Aizenman, Joshua and Sengupta, Rajeswari (2011): The financial trilemma in China and a comparative analysis with India.
Download (589kB) | Preview
A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in the era of deepening globalization. In this paper we study the Trilemma choices of the two key drivers of global growth, China and India. We overview and contrast the policy choices of the two, and test their Trilemma choices and tradeoffs. China’s Trilemma configurations are unique relative to the one characterizing other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture any significant role for financial integration. One possible interpretation is that the segmentation of the domestic capital market in China, its array of capital controls and the large hoarding of international reserves imply that the “policy interest rate” does not reflect the stance of monetary policy. In contrast, the Trilemma configurations of India are in line with the regression results of other emerging countries, and are consistent with the predictions of the Trilemma tradeoffs. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.
|Item Type:||MPRA Paper|
|Original Title:||The financial trilemma in China and a comparative analysis with India|
|Keywords:||Financial trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
F - International Economics > F3 - International Finance
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||Rajeswari Sengupta|
|Date Deposited:||03 Nov 2011 12:46|
|Last Modified:||21 Feb 2017 01:57|
 Aizenman, J., Chinn, M., and Ito, H. (2011) "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma,", Journal of the Japanese and International Economies, Vol. 25, No. 3, p. 290-320.
 Aizenman, J. (2010a). "The Impossible Trinity (aka The Policy Trilemma)”, forthcoming in the Encyclopedia of financial globalization.
 Aizenman, J., Chinn, M., and Ito, H. (2010b). "The Emerging Global Financial Architecture: Tracing and Evaluating the New Patterns of the Trilemma's Configurations", Journal of International Money and Finance, Vol. 29, No. 4, p. 615–641.
 Aizenman, J., Chinn, M., and Ito, H. (2010c) The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma," Asian Development Bank Institute Working Paper #213 (April).
 Aizenman, J., Chinn, M., and Ito, H. (2008) "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time", NBER Working Paper Series, #14533 (December 2008, updated in April 2009).
 Aizenman, J. and Glick, R. (2009) “Sterilization, Monetary Policy, and Global Financial Integration,” mimeo, University of California, Santa Cruz. Review of International Economics, Vol. 17, No. 4, pp. 777-801.
 Athukorala, P. (2009) “Outward Foreign Direct Investment from India”, Asian Development Review, 26, 125–153.
 Davies, K. (2010). “Outward FDI from China and its policy context”, Columbia FDI Profiles, issued by the Vale Columbia Center on Sustainable International Investment.  Edwards, S. and Levy-Yeyati, E. (2005) “Flexible exchange rates as shock absorbers,” European Economic Review, 49(8), 2079-2105.
 Glick, R., and Hutchison M. (2008) “Navigating the Trilemma: Capital Flows and Monetary Policy in China”, Hong Kong Institute for Monetary Research Working Paper, No.252008.
 Hutchison, M., Sengupta, R., and Singh, N.(2011) “India’s Trilemma: Financial Liberalization, Exchange Rates and Monetary Policy”, forthcoming in The World Economy.  IIF (2011) “Capital Flows to Emerging Market Economies”, Institute of International Finance, January 24.
 Kohli, R. (2011) “India’s Experience in Navigating the Trilemma: Do Capital Controls Help?” ICRIER Working Paper 257, June.
 Obstfeld, M., Shambaugh, J. C. and Taylor, A. M. Financial Stability, the Trilemma, and International Reserves, 2010: American Economic Journal: Macroeconomics, 2(2): 5794.
 Patnaik, I., A. Shah, A. Sethy, and V. Balasubramaniam. The exchange rate regime in Asia: From crisis to crisis, 2011: International Review of Economics and Finance, 20, 32-43.
Available Versions of this Item
- The financial trilemma in China and a comparative analysis with India. (deposited 03 Nov 2011 12:46) [Currently Displayed]