Exchange Rate and Asset Market: the Trilemma for China's Monetary Policy

Peng Zhang ()
Additional contact information
Peng Zhang: Investment Bank Department, Tebon Securities Company, Beijing, CHINA

Review of Economics & Finance, 2018, vol. 14, 1-16

Abstract: This paper investigates the trilemma for China's Central Bank based on IS-LM-BP model and Vector Error Correction Models. According to a revised IS-LM-BP model, which incorporates the special monetary supply mechanism of Emerging Market Economies, depreciation restrains the growth of the monetary base in the trilemma. Then the central bank may not catch two goals of monetary independence and exchange rate stability together, even giving up the full capital mobility. The evidence during the 2014-2016 period shows that the severe capital outflow trapped China in a trilemma. In this situation, RMB depreciation negatively and heavily shocked asset price by influencing China¡¯s interest rate. Along with the contraction of global monetary cycle and the bubble-like asset price in China, that mechanism might amplify the risk of China¡¯s macro economy. According to the empirical analysis, operation twist (including asset purchase operations) could guarantee China's monetary policy autonomy and bolster the asset market in the trilemma.

Keywords: Asset price; Exchange rate; Interest rate; Monetary policy; Open-economy Trilemma (search for similar items in EconPapers)
JEL-codes: E43 E52 F31 F41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.bapress.ca/ref/ref-article/1923-7529-2018-04-01-16.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bap:journl:180401

Ordering information: This journal article can be ordered from
17 Alton Towers Circle, Unit 101 Toronto, ON, M1V3L8, Canada

Access Statistics for this article

Review of Economics & Finance is currently edited by H. Carlson

More articles in Review of Economics & Finance from Better Advances Press, Canada 17 Alton Towers Circle, Unit 101 Toronto, ON, M1V3L8, Canada.
Bibliographic data for series maintained by Carlson ( this e-mail address is bad, please contact ).