Exchange Sterilized Intervention Channels Effectiveness And Foreign Exchange Write-off The Effectiveness Of Interventions

Ⅰ. Objective and backgroundThis paper deals with the effectiveness of the two channels in sterilized intervention: portfolio balance channel and expectation channel, analyzes their effectiveness in case of China, and deducts policies which should be taken to improve the effectiveness of the sterilized intervention in China.Foreign exchange intervention is critical for foreign exchange rate policy. It aims to counteract the shock to the foreign exchange rate, and bring it to the reasonable place determined by the fundamental variables when the actual exchange rate is far away from the equilibrium point. On Jul, 21st, 2005, the People's Bank of China announced the reform of the RMB exchange rate management system. The exchange rate of RMB will no longer be pegged to U.S. dollar and will be priced in reference to a basket of currencies. As one of the two types of intervention, sterilized intervention will set domestic monetary policy free from the influence of exchange rate policy. So, it is important to research the effectiveness of the two channels in sterilized intervention.Ⅱ. Main ideas and structureAfter introduction of some important issues related to sterilized intervention, such as the definition, the reasons, the target of intervention and its relation to the independence of the central bank in chapter 1, the paper researches the effectiveness of the portfolio balance channel on theory in chapter 2. After comparing the classical exchange rate models with portfolio balance model, I find non-sterilized intervention is effective under both models, but sterilized intervention is effective only under the latter, given that the uncovered interest parity (UCIRP) does not...