Inclusion of the RMB in SDRs and the impossible trinity in China

Ling Feng, Duong Thuy Le and Fan Yuan

Economic Systems, 2023, vol. 47, issue 2

Abstract: This paper explores the dynamics and features of the impossible trinity configuration in China, in the process of reforming the renminbi (RMB) exchange rate and inclusion in the currency basket of special drawing rights (SDR). By applying the synthetic model of Ito and Kawai (2014) and Aizenman et al. (2008) to Chinese data for the period between 2002 and 2019, we find structural breaks in China’s exchange rate stability in 2005, when China started its market-oriented exchange rate reform, and 2016, when the RMB was included in the SDR. More importantly, we find that, in the process of RMB exchange rate reform and RMB’s inclusion in the SDR, China has adopted a more flexible exchange rate regime, becoming more financially open, monetarily independent, and less reliant on international reserves hoarding.

Keywords: Impossible trinity; RMB; Special drawing rights (search for similar items in EconPapers)
JEL-codes: E52 F41 O24 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:47:y:2023:i:2:s0939362522000036

DOI: 10.1016/j.ecosys.2022.100941

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