An Updated Look At The Economic Trilemma In China

The well-known economic trilemma states that a country must give up one among exchange rate stability, monetary independence and capital openness.

America takes monetary independence and capital openness.

China takes exchange rate stability and monetary independence. The following chart was updated by economist Menzie Chinn to show the rising importance of exchange rate stability through 2009. Read how the indices are measured at Econbrowser.

Figure 1: exchange rate stability (blue), monetary independence (red), and capital openness (green). Source: Aizenman, Chinn and Ito.

Of course increased capital inflows have put pressure on the other legs of the trilemma, forcing China to choose once more.