Date of Award

Summer 2023

Degree Type

Open Access Dissertation

Degree Name

Economics, PhD


School of Social Science, Politics, and Evaluation

Advisor/Supervisor/Committee Chair

Thomas D. Willett

Dissertation or Thesis Committee Member

Graham Bird

Dissertation or Thesis Committee Member

Levan Efremidze

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2023 Shan Xue

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The monetary trilemma autonomy has been at the heart of a great deal of international monetary analysis. It implies that countries with fixed exchange rates and no capital controls will lose monetary autonomy. What is often not recognized, however, is that the trilemma need not hold in the short run. If capital mobility is less than perfect, then countries can sterilize reserve flows and maintain a degree of monetary autonomy in the short run. Hong Kong is a natural case to test this possibility since it has a credibly fixed exchange rate against the dollar and no major capital controls. We investigate this issue using two approaches. One is to estimate the effects of changes in U.S. interest rates on those in Hong Kong. As with earlier literature, we find that the pass-through, while considerable, is substantially less than one, indicating imperfect capital mobility. The second is to estimate whether Hong Kong has been able to engage in some degree of sterilization. This has not been done before. An important issue here is how to measure Hong Kong's monetary base. Because of the particular institutional arrangements in Hong Kong, the Monetary Authority uses a measure of the monetary base that differs from the standard IMF definition. By both measures, we find that Hong Kong has been able to practice partial sterilization of international reserve flows in the short run and hence does have some degree of monetary autonomy. Another challenge the standard trilemma analysis faces focuses on the effectiveness of flexible exchange rates in monetary insulation. Rey (2013) argued that "dilemma not trilemma"—an economy could not have monetary autonomy unless capital controls are used regardless of exchange rate regimes. The argument can be usefully examined with the cases of Singapore and Hong Kong. Both economies are small and open, but they choose different exchange rate regimes—the Monetary Authority of Singapore (MAS) uses a managed floating exchange rate. We also estimate the interest rate pass-through from the U.S. to Singapore and Singapore's offset and sterilization coefficients. Our results show that Singapore's economy is insulated from oversea monetary shocks to a more considerable extent than Hong Kong. It suggests that the trilemma has not become a "dilemma" and that flexible exchange rates are effective in helping a small open economy to maintain a degree of monetary independence.



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