ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Ila Patnaik and Ajay Shah 7.1 INTRODUCTION A core idea in modern macroeconomics is that of the ‘impossible trinity’, the notion that a country can have only two of the following at any given time: an open capital account, a fixed exchange rate and an autonomous monetary policy. With the exception of the eurozone countries, most developed countries have an open capital account, a floating exchange rate and an autonomous monetary policy.1 In Asia, a few polar examples like Hong Kong, China have a fixed exchange rate, an open capital account and no monetary policy autonomy. In general, however, Asian economies tend to lack a welldefined monetary policy framework, with most having a combination of some capital controls and exchange rate inflexibility. This raises questions about the current state and possible evolution of monetary policy in Asia, and highlights the need for a consistent monetary policy framework. In this chapter, we focus on 11 major economies in Asia: the People’s Republic of China (PRC); Hong Kong, China; India; Indonesia; Republic of Korea (hereafter Korea); Malaysia; the Philippines; Singapore; Taipei,China; Thailand and Viet Nam. This is a highly heterogeneous group, ranging from city-states like Singapore to giants like the PRC, and poor economies like India to rich economies like Taipei,China and Korea. We refer to these economies as the Asia-11. We examine where the Asia-11 stand with respect to the three corners of the impossible trinity: capital controls, the exchange rate regime and monetary policy autonomy. We obtained summary...
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