Trilemma Challenges for the People’s Republic of China
Kawai, Masahiro; Liu, Li-Gang | January 2015
Abstract
This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policy making in the People’s Republic of China (PRC). It then observes that the PRC’s monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and a McCallum-like rule to test whether the PRC’s money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the Renminbi as long as it continues to pursue capital account opening.
Citation
Kawai, Masahiro; Liu, Li-Gang. 2015. Trilemma Challenges for the People’s Republic of China. © Asian Development Bank. http://hdl.handle.net/11540/4092. License: CC BY 3.0 IGO.Keywords
Development
Finance
Development Challenges
Development Issues
Development Problems
Microenterprises Finance
Commercial Finance Companies
Enterprise Financing
Financial Analysis
Banking Finance And Investment
ADB
Project finance
Development plans
Strategic planning
Business Financing
Investment Requirements
Insurance Companies
International Monetary Relations
International Financial Market
Exchange Rate
Insurers
Insurance stocks
Insurance holding companies
Insurance carriers
Insurance agencies
Business subsidies
Investment companies
International banks and banking
Stock exchanges
Grants
Loans
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Citable URI
http://hdl.handle.net/11540/4092Metadata
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