Trilemma Challenges for the People's Republic of China

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Asian Development BankThe Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI's working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.Working papers are subject to formal revision and correction before they are finalized and considered published.Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, JapanTel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.org E-mail: info@adbi.org AbstractThis 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. JEL Classification: E52, E58ADBI Working Paper 513Kawai and Liu

“Impossible Trinity” effects on Macroeconomic performance in Non-oil Arab Economies: Evidence from Egypt, Jordan, Lebanon, Morocco, and Tunisia

“…Same findings found in Goh and McNown (2015) when reviewing the existence of Trilemma in Malaysia using Error Correction Model estimation. Kawai and Liu (2015) confirmed the same findings using monthly data for China from 1990 to 2014 when testing Trilemma challenges using generalized method of moments procedure (GMM). Majumder and Nag (2021) assessed the existence of Trilemma using quarterly data from 1991 to 2018 for India using Instrumental Variable method (IV).…”

“…Despite the multiplicity of empirical studies, both at one country level or at multi-country level, there was no consensus on the validity of Trilemma (Ihnatov and Căpraru, 2014). Some studies confirmed the validity of Trilemma such as Aizenman et al (2013); Bhatta et al (2021); Goh and McNown (2015); Hsing, 2012 a ; Kawai and Liu (2015); Majumder and Nag (2021) and You et al (2014). Others have failed to prove such Trilemma like Kim and Lee (2008) and Rey (2015).…”

Renminbi Internationalization in the New Normal: Progress, Determinants and Policy Discussions

“…In addition, capital controls are often partially effective, and, thus, capital fl ows through non-regulated channels remain a persistent concern for the monetary authority. This is actually the case for many emerging countries and especially for China (see Baba and Kokenyne, 2011;Kawai and Liu, 2015).…”

Impossible Trinity in a Small Open Economy: A State–Space Model Simulation

“…Evidence from emerging market economies (EMEs) also supports the impossible trilemma hypothesis. Kawai and Liu (2015) identified that China is losing its monetary policy independence due to reduced capital controls and a rigid exchange rate regime. Goh and McNown (2015) showed that the US and Malaysian interest rates cointegrated during the fixed exchange rate regime period of 2001-2005 but not during the managed float regime period of 1991-1998, providing strong evidence in favor of the impossible trinity hypothesis.…”

“…The trilemma condition is further discussed in Section 3 of this study. Kim and Lee (2008); Paul (2012); You et al (2014); Kawai and Liu (2015); Goh and McNown (2015); Chakraborty (2016); Lim andGoh (2016) andDe Waal, Gupta, andJooste (2018) studied the effect of the foreign interest rate, either the London interbank offered rate (LIBOR) or the central bank policy rate, on the domestic interest rate. Most of these studies assume a reciprocal relationship between the home and foreign interest rates.…”