| In recent years, China's foreign trade continued surplus, and RMB is expected to appreciation. A large volume of capital began to flow into our country. And our country's foreign exchange reserves increased rapidly. The impact of foreign capital on China's economy is also increasing. How to deal with the large-scale capital inflows has become a severe economic problem currently facing our country. China's central bank implemented a variety of sterilization to withstand external shocks and maintain internal balance and achieve domestic economic policy goals. And such the effectiveness of the sterilization is very important.In this paper, a reference to foreign policy scholars on capital inflows to sterilize, by the association for the entire theory and vector error correction (VEC) model inspected the quantitative relationship between monetary aggregates and foreign exchange reserves to show the effectiveness of China's central bank's sterilization, also make a suggestion what policy responses should be undertaken.In the first chapter, we provided the research results about capital inflows and sterilization in domestic and foreign. And we described the purpose of this study and basic research methods. After the Asian financial crisis, foreign scholars who research capital inflows to developing countries gave a lot of research. They focused on analysis of the macroeconomic impact of capital inflows, as well as the policy responses undertaken by the recipient countries. Scholars from different perspectives have their own inspection of the effectiveness of sterilization. This paper summarizes that, in testing for the effectiveness of sterilization, the conventional method of estimating the offset coefficient of the capital flow equation along with the monetary policy reaction function would be inappropriate. For this reason, in this paper, we will test for the effectiveness of sterilization by estimating the extent to which foreign reserves(FR) in the monetary base explains or predicts monetary aggregates, setting aside the question of how sterilization is actually effected.Chapter 2, we analyzed the capital inflows after the monetary policy transition in 1994, especially after joining the WTO in 2001. We found that the reason for the capital inflows in China is domestic pull factors. The pull factors for foreign investment in China mainly from the following aspects: (1) China's economic growth in the expansion phase of the economic cycle fluctuations. (2) As China's entry into the World Trade Organization, China's opening up much. (3) the increasing expectation of a revaluation of the RMB. (4) improving the domestic investment environment. (5) Institutional distortions caused by government intervention and inefficient investment and financing.Chapter 3, we systematically introduced theories concerning sterilization operation and explained sterilization operation's basic principle and main sterilization measures, and we have a discussion about the negative impact of sterilization.From the previous analysis, we can see that in order to maintain a stable exchange rate, the central bank buy foreign assets in the foreign exchange market and dished out the money. Make changes in their own base currency, the monetary authorities recovered a variety of ways, such as through open market operations, to maintain the same amount of base money, did not change its interest rates to achieve a balance between internal and external balance. Therefore, we have passed the examination to test the relationship between money aggregates and foreign exchange reserves to show the effectiveness of sterilization, setting aside the question of how sterilization is actually effected.In chapter 4, we use quarterly data for the 10-year period from the first quarter of 1995 through the forth quarter of 2005. Broad money (M2) are used as the measures of monetary, foreign exchange reserves (FR) Gross domestic product (GDP) of these three variables quarterly data modeling. We will test for the effectiveness of sterilization. First of all, we use Johansen's trace tests to test for the presence of co-integration among these variables. This is the entire agreement between these variables, the Association for Standardization of the whole equation: LRM2=-3.14+0.041LRFR+2.03LRGDPSAFrom this equation we can see that, the long-run equilibrium relationship exists among the monetary aggregates (M2), foreign exchange reserves and GDP. However, the association for the whole equation coefficient, the impact of the foreign exchange reserves to M2 is smaller, and the impact of GDP on M2 is greater.Due to the presence of co-integration among these variables, the paper establishes a vector error correction (VEC) model, do further analysis. First, we will test for Granger causality between monetary aggregates and foreign exchange reserves. In the VEC model, foreign exchange reserves (FR) is not found Granger cause monetary aggregates (M2). To the extent that the multivariate system can generally be considered more appropriate, we conclude than no Granger causality was found from foreign exchange reserves (FR) to monetary aggregates during 1995-2005. But GDP is found to Granger cause M2. The effective sterilization would limit the growth of monetary aggregates. So far, the causality tests have suggested the possibility that sterilization was effective in limiting the growth of monetary aggregates.Next, we obtain the impulse response of the VEC model. From the impulse response function of M2 to GDP and foreign exchange reserves we can see that foreign exchange reserves increased by one standard deviation, in the first phase, had little impact on the M2. In time 2 and time 3 is a smaller effect, on time 4 and time 5, the effects became zero, we can believe that M2 in the first to fifth time, the impact of foreign exchange reserves is smaller, from time 6 there is a positive impact. The monetary aggregates to GDP impact of the impulse response function of a standard deviation. M2 to GDP impulse response in time 1 and time 2 are basically zero, in the second period had begun to grow, at time 4 and time 5 in the maximum impact. Associated with the results of Granger causality test, we can find than in the period 1995-2005, China's central bank restricted money aggregates growth in the hedge is to operate effectively.Finally, based on the previous analysis and the capital inflows in China since 2006, we put forward a suggestion what the central bank should do. At the end of 2006, China's balance of foreign exchange reserves exceeded one trillion, and reached 1.0663 trillion U.S. dollars, the foreign exchange reserves increased 247.3 billion U.S. dollars in 2006. This brings to China's Central Bank for a increasing pressure in sterilization. To reduce the pressure, this paper suggest that our country should relax rate of exchange control further, perfect foreign exchange market system, make exchange rate of RMB more norm. We should also speed the reform that the interest rate market turn further, on the foundation of the establishment of " banking in Shanghai the same profession dismantle to put interest rate", create the Chinese Federal Funds interest rate and grow the interest rate system of the monetary market. |
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