Monday, January 18, 2010

Asia Confronts the Impossible Trinity

NIPFP Working Paper 64

Ila Patnaik and Ajay Shah
January 2010


In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian countries. Asia has made slow progress on de jure capital account openness, but has made much more progress on de facto capital account openness. While there is a slow pace of increase in exchange rate flexibility, most Asian countries continue to have largely inflexible exchange rates. This combination - of moving forward with de facto capital account integration without bringing in exchange rate flexibility - has lead to procyclicality of monetary policy when capital flows are procyclical. The paper emphasizes the case for a consistent monetary policy framework.