A Research On The Effective Of The Central Bank Of China's Exchange Intervention And Sterilization

Under the current economic situation of China, in order to maintain the stability of RMB exchange rate and economic development, the monetary authorities constantly put in place operations such as intervention in the Foreign exchange and Sterilization in the Open operations market. However because of the excessive intensity of the measures a series of questions arise, such as the increase of foreign exchange reserves, excess market liquidity, and too much issuance of central bank bills and so on. How to make sterilize intervention effectively to achieve the external balance and ensure balance within the internal economy has been a major issue of common concern.This article will thoroughly study the effectiveness of the intervention in the Foreign exchange market and the Sterilization in the Open operations market. First, we analyst the current situation of the Sterilized intervention, and propose the problem existed in the intervention. Secondly, we judge the effectiveness of the foreign exchange intervention, through the analysis of the relationship between intervention of foreign exchange and risk premium. And then we make a thorough inquiry on the relationship between foreign exchange reserves and inflation in China, trying to show the effectiveness of sterilization policy. And then we make a further judgment on the effectiveness of sterilization policy by a sterilizing model. Finally this article will give corresponding policy recommendations to solve the problems in the process of foreign exchange intervention and sterilizing intervention.The first and second part of the article will review the literature about the effectiveness of foreign exchange intervention and sterilization operations. In the second chapter we analyst the current situation of the Sterilized intervention, and propose the problem existed in the intervention. In the third part, first, curve regression analysis demonstrates the assumption of imperfect substitutability between domestic and foreign assets. The empirical analysis using VAR model shows that there exists co-integration relationship between the risk premium and the intervention in the foreign exchange market. The existence of the risk premium is the reason of the foreign exchange intervention. And the intervention in the Foreign exchange market leads to the changes of the exchange rate. Empirical researches concluded that China's foreign exchange intervention through portfolio balance channel is effective. In the fourth chapter, after Granger test, we know that there was no significant relationship between foreign exchange reserves and money supply. And then we demonstrate that the relationship of the foreign exchange reserves which transferred by money supply and the inflation effect is not very significant. That all illustrate that the sterilization operations by the central bank have effectively relieve the pressure monetary expansion Later through Construction of sterilization model, we analysis situation of each quarterFinally, on the basis of the theoretical analysis and empirical analysis, this paper gives policy recommendations on purpose of dealing with problems existing in foreign exchange intervention and sterilizing intervention. Aimed at foreign exchange intervention, the recommendations includes gradually broadening the RMB exchange fluctuation section,improving intervention methods, and play the role of OMOs; The recommendations about sterilizing intervention are that using interest rate policy reasonably and promoting the development of bond market.