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Trilemma Challenges for the People's Republic of China

Author

Listed:
  • Kawai, Masahiro

    (Asian Development Bank Institute)

  • Liu, Li-Gang

    (Asian Development Bank Institute)

Abstract

This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policymaking in the People's Republic of China (PRC). It then observes that the PRC's monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and the McCallum-like rule to test whether the PRC's money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the renminbi as long as it continues to pursue capital account opening.

Suggested Citation

  • Kawai, Masahiro & Liu, Li-Gang, 2015. "Trilemma Challenges for the People's Republic of China," ADBI Working Papers 513, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0513
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    References listed on IDEAS

    as
    1. Liu, Li-Gang & Pauwels, Laurent L., 2012. "Do external political pressures affect the Renminbi exchange rate?," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1800-1818.
    2. C. H. Kwan, 2013. "Business Cycle in China since the Lehman Crisis: Interaction among Macroeconomic Policy, Economic Growth and Inflation," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 21(5), pages 1-19, September.
    3. Liu, Li-gang & Zhang, Wenlang, 2010. "A New Keynesian model for analysing monetary policy in Mainland China," Journal of Asian Economics, Elsevier, vol. 21(6), pages 540-551, December.
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    Cited by:

    1. Shang-Jin Wei, 2018. "Managing Financial Globalization: Insights from the Recent Literature," NBER Working Papers 24330, National Bureau of Economic Research, Inc.
    2. Han, Xuehui & Wei, Shang-Jin, 2018. "International transmissions of monetary shocks: Between a trilemma and a dilemma," Journal of International Economics, Elsevier, vol. 110(C), pages 205-219.
    3. Han, Xuehui & Wei, Shang-Jin, 2016. "International Transmissions of Monetary Shocks," CEPR Discussion Papers 11070, C.E.P.R. Discussion Papers.
    4. Shang-Jin Wei, 2018. "Managing Financial Globalization: Insights from the Recent Literature," Working Papers id:12586, eSocialSciences.

    More about this item

    Keywords

    trilemma challenges; exchange rate regimes; monetary policy autonomy; peoples republic of china; taylor rule; mccallum rule;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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