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The Impossible Trinity Revised: An Application to China

Benjamin Carton ()

Working Papers from CEPII research center

Abstract: In a fixed exchange-rate regime, monetary policy is not devoted to internal equilibrium, such that the Taylor principle is no more the condition to insure the determinacy of the dynamic. Monetary policy is in charge of stabilizing the fixed-exchange rate regime in the long run, i.e. to avoid an excessive accumulation of foreign reserves, or their depletion. For this purpose, the monetary policy rule has to include the evolution of the net foreign asset position. Stabilizing the fixed exchange-rate regime entrenches the ability of monetary policy to influence the internal equilibrium, despite sizable restrictions on capital mobility. This translates into a restriction on implementable monetary-policy rules. Ill-designed monetary-policy rules generates long-lasting fluctuations of the trade balance and the real exchange rate.

Keywords: Impossible Trinity; Monetary Policy; CHINA (search for similar items in EconPapers)
JEL-codes: F32 F33 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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