Does China’s fear of floating exceed its fear of deflation?
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WHEN ECONOMISTS pass judgment on exchange-rate regimes, they like to invoke the monetary-policy “trilemma”. A country might want a stable currency, free capital flows and an independent monetary policy, which can respond to the needs of the domestic economy, regardless of what central banks elsewhere are doing. There are, however, intrinsic tensions between these objectives. And so, sad to say, a country can choose only two of the three.
The trilemma is a canonical bit of theory. In practice, however, the choice is not so stark. No country can have all three blessings in full. But some countries, such as China, like a little of each.
This year, for example, China has tried to go its own way in monetary policy. A property slump, low consumer morale and falling exports have marred the economy’s reopening from covid-19, contributing to dangerously low inflation. In response, China’s central bank has eased its monetary stance, even as interest rates have risen dramatically in America and elsewhere. It lowered reserve requirements for banks on September 15th for the second time this year. It has also twice cut interest rates.... ...
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