Monetary and Currency Policy Management in Asia
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Monetary and Currency Policy Management in Asia

Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi

This book makes concrete macroeconomic policy recommendations for Asian economies aimed at minimizing the impacts of an economic and financial downturn, and setting the stage for an early return to sustainable growth. The focus is on short-term measures related to the cycle. The three main areas addressed are: monetary policy measures to achieve both macroeconomic and financial stability; exchange rate policy and foreign exchange reserve management, including the potential for regional exchange rate cooperation; and ways to ease the constraints on policy resulting from the so-called ‘impossible trinity’ of fixed exchange rates, open capital accounts and independent monetary policy.
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Chapter 7: Asia Confronts the Impossible Trinity

Ila Patnaik and Ajay Shah


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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