From “monetary trilemma” to “financial trilemma”: a new perspective of international capital flows

FAN Xiaoyun1 LIU Liang2 CHEN Lei3

(1.School of Finance, Nankai University)
(2.Accounting and Auditing Institution, State Grid Energy Research Institute)
(3.International School of Business & Finance, Sun Yat-sen University)

【Abstract】This paper analyzed the history of international finance and stressed that the new open macroeconomics is based on the assumption of “triple coincidence,” which is the coincidence of GDP area, currency area and decision-making unit. Policymakers have focused on the framework of “monetary trilemma.” The paper argued that financial factors have become more and more important and pointed out the shortcomings of the traditional framework. It further analyzed the “financial trilemma,” which involves relationship among financial globalization, financial policy independence and financial stability. The paper proposed some new perspectives for looking at international capital flows: (1) breaking of the GDP area restriction; (2) international currencies taken into consideration; and (3) the heterogeneity of decision-making units taken into consideration. It also suggested that more attention should be paid to the consolidated balance sheets of multinational banks and non-financial enterprises; and gross capital flows should be analyzed to study the characteristics of liquidity and financial instability so that suggestions can be made for a country to implement appropriate prudential macro management to achieve domestic financial stability against the backdrop of financial globalization and properly manage global banking liquidity.

【Keywords】 monetary trilemma; financial trilemma; international capital flows; financial stability;

【DOI】

【Funds】 National Social Science Fund of China (17ZDA074, 16ZDA031) National Natural Science Foundation of China (71473278) National Natural Science Foundation of China (71703173) China Postdoctoral Science Foundation (2018M631010)

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    Footnote

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This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 04, Pages 126-144+7-8

July 2018

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Abstract

  • 1 Mainstream analytical framework behind the monetary trilemma
  • 2 Links between “monetary trilemma” and “financial trilemma”
  • 3 Implications of research on international capital flows
  • 4 Conclusion
  • Footnote