PhD Thesis in International Economics
21 December 2020

Addressing challenges to open-economy macroeconomic policies

A recent PhD thesis empirically assesses topics in international finance and macroeconomics in order to draw policy implications and to signal possible economic and financial risks. Dr Feier Qin presents here two of her doctoral essays: “International Use of the Yuan and Determinants of Currency Choices in Manufacturing Trade: Evidence from Chinese Custom Data” and “Capital Controls, Macroprudential Policy, and the Mundellian Trilemma”, and their policy implications.

“International Use of the Yuan and Determinants of Currency Choices in Manufacturing Trade: Evidence from Chinese Custom Data”

This first key paper of my dissertation assesses the driving factors of invoicing with reference to the prospect for renminbi internationalisation vis-à-vis the dominant role of US dollar in trade. With the use of microlevel transaction data and application of multinomial logit model, novel aspects are identified, including pro-renminbi factors such as share of labour cost in total cost, the extent of foreign direct investment, and pro-dollar drivers, including geographical distance, insurance coverage, and integration into the global value chain.

Policy implications: my findings show that the renminbi is more likely to be transacted in industries with higher domestic cost (e.g. wage, human capital), so that China’s structural policies to foster human capital and innovation are a long-term boost to the international status of its currency. The renminbi is also more accepted in countries where there is Chinese investment. Thus, building the credibility of the renminbi through better exchange rate flexibility and more liberalised capital account are essential international financial policies to further promote cross-border use of the renminbi in global trade.

Read the latest version of the paper here >

“Capital Controls, Macroprudential Policy, and the Mundellian Trilemma”

The second key paper assesses how countries can obtain policy autonomy. Using a sample of 45 major advanced and emerging economies in the era of financial globalisation, I find that a flexible exchange rate and/or active macroprudential policy can support autonomy, and thus contribute to the ongoing debate between dilemma and trilemma. Through an interacted panel VAR model, I show that exchange rate flexibility still allows periphery countries to respond less to US monetary policy spillovers. Capital controls, by contrast, provide little help. Macroprudential policies can also enhance the independence of monetary policy. especially for advanced economies. This implies that, facing the global financial cycle, policies aimed at domestic financial stability can reinforce the trilemma framework, where flexible exchange rate can effectively ensure monetary autonomy in an open economy.

Policy implications: for most of the non-US economies, flexible exchange rate remains the more effective Fed shock absorber, if the goal is for independent central bank interest rate policy, instead of other financial risk concerns such as balance sheet misalignment or sudden stop in capital inflows. In this regard, capital flow restrictions are unnecessary. Instead, macroprudential tools aiming at domestic financial stability can serve to further reduce the response of policy rate to US monetary spillovers.

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Feier Qin defended her PhD thesis in International Economics in October 2020. Professor Ugo Panizza presided the committee, which included Professor Cédric Tille, thesis supervisor, and Mr John H. Rogers, Economist and Senior Adviser, Board of Governors of the Federal Reserve System, Washington DC, USA. 

Full citation of the PhD thesis:
Qin, Feier. “Essays in International Finance and Macroeconomics.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2020.

Good to know: members of the Graduate Institute can download Dr Qin’s PhD thesis from this page of the Institute’s repository.

Editing by Nathalie Tanner, Research Office.
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