PBoC Deals With Impossible Trinity in a Time of QE

A timely working paper release ahead of this week's Federal Reserve meeting.

iFeng: 中国央行:单纯依靠汇率浮动不足以抑制资本流动
The central bank said, according to the impossible triangle theory, a country's monetary authorities between independent monetary policy and free movement of capital and a stable exchange rate of the three objectives must be given a choice, can only meet two objectives, and give up another goal. However, since 2008 the international financial crisis, central banks in developed economies, quantitative easing monetary policy put in a lot of excess liquidity, the liquidity did not enter the real economy, but the global financial markets arbitrage, so that capital flows are very large, and often flow there will be drastic changes. This leads to the importance of the impossible triangle free movement of capital significantly improved, and the importance of exchange rate stability and an independent monetary policy is relatively decreased. In other words, in the large-scale economic and financial globalization and capital flows in the background, the floating exchange rate is not sufficient to inhibit the flow of capital, and therefore can not guarantee an independent monetary policy. Taking into account both capital flows to a country's economy may bring positive spillover effects, may also be a negative impact on country's economy, and rely solely on exchange rate fluctuations can not fully offset this, if you want to get the overall balance of the macro, we need to efforts in three areas: First, greater exchange rate flexibility; second is to improve cross-border capital flows, macro-prudential policy framework; third is to strengthen international coordination of monetary policy.
Based on a two-country Stackelberg game theory model, this paper conducted research on the impact and effectiveness of monetary policy coordination among large open economies with different spill-over effects. The paper finds that when policies are coordinated, there is an improvement in total welfare compared with the scenario when there is no monetary policy coordination.

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