Does Trilemma Speak Chinese?

Georgios Magkonis and Simon Rudkin

No 2019-01, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

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.

Keywords: Trilemma; international reserves; Panel VAR (search for similar items in EconPapers)
JEL-codes: F36 F41 O53 (search for similar items in EconPapers)
Pages: 23
Date: 2019-01-09
New Economics Papers: this item is included in nep-cna, nep-mon, nep-opm, nep-sea and nep-tra
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