In recent years China has faced an increasing trilemma—how to pursue an independent
domestic monetary policy and limit exchange rate flexibility, while at the same time facing
large and growing international capital flows. This paper analyzes the impact of the trilemma
on China's monetary policy as the country liberalizes its good and financial markets and
integrates with the world economy. It shows how China has sought to insulate its reserve
money from the effects of balance of payments inflows by sterilizing through the issuance of …