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Does Trilemma Speak Chinese?

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  • Georgios Magkonis

    (University of Portsmouth)

  • Simon Rudkin

    (Swansea University)

Abstract

Based on the limitations imposed by the trilemma, this paper examines the trade-offs faced by the Chinese economy. Taking into account the role of accumulation of foreign reserves we examine how binding the constraints are for the Chinese monetary authorities. Using a Panel VAR with dynamic and static interdependencies as well as cross-sectional heterogeneities, we examine the monetary spillovers from China to a series of Asian economies. In this way, we measure the degree to which the Chinese trilemma constraints are exported to other countries. Consistent with previous research, our empirical evidence suggests that China's trilemma configurations are unique as China manages to achieve exchange rate stability, along with moderate financial liberalization, without losing its monetary autonomy. Furthermore, there are no significant spillovers to regional economies. Overall, trilemma does speak Chinese, but only for a short period.

Suggested Citation

  • Georgios Magkonis & Simon Rudkin, 2019. "Does Trilemma Speak Chinese?," Working Papers in Economics & Finance 2019-01, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
  • Handle: RePEc:pbs:ecofin:2019-01
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    More about this item

    Keywords

    Trilemma; international reserves; Panel VAR;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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