Financial Trilemma in China and a Comparative Analysis with India

Abstract

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 an era of widespread globalization. In this paper we overview and contrast the Trilemma policy choices and tradeoffs faced by the two key drivers of global economic growth-China and India. China's Trilemma configurations are unique relative to other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture a consistently significant role for financial integration. In contrast, the Trilemma configurations of India are in line with choices made by other emerging countries. 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.

The open economy trilemma in Latin America: A three‐decade analysis

“…The results show that the coefficients on lagged inflation, lagged output gap, and the dummy variable for high inflation are positive and significant in most models. Similar to those found by Aizenman et al () and Aizenman and Sengupta (), the coefficients on international reserves on GDP are not significant for the majority of the estimated models.…”

“…The population growth rate is positive and statistically significant for most of the models estimated and thus represents a source of output instability. Consistent with Aizenman et al () and Aizenman and Sengupta (), the coefficients of the international‐reserves‐to‐GDP ratio are not significant. Similarly, the interaction terms between the trilemma indices and international reserves are not statistically significant for most of the estimated models.…”

“…Based on Mollick, Cabral, and Carneiro (), this variable is particularly relevant for analysis related to developing economies because the population growth rate tends to be greater than the output growth rate and thus implies greater output volatility. INF —inflation rate. A key variable for trilemma analysis (see Aizenman et al, , ; Aizenman & Sengupta, ; Hutchison, Sengupta, & Singh, ). There is no doubt that lower inflation correlates with better economic performance. INF‐b­ —transformed inflation rate.…”

“…An increase in the output gap (actual output greater than potential GDP) correlates with increased inflation. IR —international‐reserves‐to‐GDP ratio. International reserves affect directly the trilemma configuration (Aizenman et al, ; Aizenman & Sengupta, ). MI , ES , and KO —trilemma indices ( tlm ) as proposed by Aizenman et al (, ). According to the authors, the indices have a linear relationship.…”

The Open‐Economy Trilemma in China: Monetary and Exchange‐Rate Policy Interaction under Financial Repression

“…In a paper that more or less reflects the official opinion of the Chinese monetary authority, Jin () argues for a non‐corner solution to the open‐economy trilemma that attempts to define such a balanced combination of the three macroeconomic policy goals. Aizenman and Sengupta () further explore the cases of China and India in this regard.…”