The financial trilemma in China and a comparative analysis with India

Joshua Aizenman and Rajeswari Sengupta

MPRA Paper from University Library of Munich, Germany

Abstract: A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in the era of deepening globalization. In this paper we study the Trilemma choices of the two key drivers of global growth, China and India. We overview and contrast the policy choices of the two, and test their Trilemma choices and tradeoffs. China’s Trilemma configurations are unique relative to the one characterizing other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture any significant role for financial integration. One possible interpretation is that the segmentation of the domestic capital market in China, its array of capital controls and the large hoarding of international reserves imply that the “policy interest rate” does not reflect the stance of monetary policy. In contrast, the Trilemma configurations of India are in line with the regression results of other emerging countries, and are consistent with the predictions of the Trilemma tradeoffs. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.

Keywords: Financial trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness (search for similar items in EconPapers)
JEL-codes: E52 E58 F3 F41 (search for similar items in EconPapers)
Date: 2011-11-01
New Economics Papers: this item is included in nep-dev, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Financial Trilemma in China and a Comparative Analysis with India (2013)
Working Paper: The Financial Trilemma in China and a Comparative Analysis with India (2012)
Working Paper: The financial trilemma in China and a comparative analysis with India (2012)
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