Written Off Our Country Central Bank Intervention On The Effectiveness Of Theoretical And Empirical Research

Since the foreign exchange system reform in1994, China has gone through Double Surplus (current account surplus and capital account surplus) for many years. With the arrangement of mandatory foreign exchange settlement, China’s foreign exchange reserves have accumulated rapidly, and the foreign assets of People’s Bank of China-the central bank has expanded. This leads to the expansion of monetary base and has brought a lot of inflationary pressures on domestic economy. In order to reduce the impact of over-increased foreign exchange reserves, and have a control on money supply, the central bank has to use various monetary policy tools to sterilize the money supply brought about by the double surplus. How to effectively maintain the independence and autonomy of domestic monetary policy through sterilization, is of great significance for China’s internal and external equilibrium and steady economic growth.This thesis first summarizes the status quo of foreign exchange sterilization in China since1994, including a brief introduction about sterilization tools (open market operations, legal deposit reserve ratio, rediscount and refinancing) and the history of sterilization operations in China by dividing1994-2011into five stages.The model used in empirical test on sterilized intervention effectiveness of China is offset coefficient and sterilization coefficient model. We establish a simplified model of a single equation-the central bank reaction function to estimate sterilization coefficient. Estimated results showed that capital flow, gross domestic product (GDP) have significant impact on central bank monetary policy, sterilization coefficient of central bank is about54%. The central bank sterilized about50%of net capital inflows during1998-2011. After that, we use structural method to estimate the offset coefficient of China in1998-2011, by estimating net external liability equation, money demand equation and money supply equation in China. We find that China has a offset coefficient of about14%, which demonstrate that the capital flow in China will have some offset impact on the domestic monetary policy.Given the empirical results and the analysis of status quo of foreign exchange sterilization in China, we conclude that the defects of sterilization tools, the imperfection of foreign exchange management system and the exist of offset impact are the constraint factors of sterilized intervention effectiveness in China. The innovation of this paper is, that when estimate the reaction function of central bank, I take into account both open market operations and deposit reserve ratio. Through adjusting the central bank’s net domestic asset by deposit reserve ratio, I obtain a variable which can reflect changes in monetary policy more comprehensively. This method avoids the one-sidedness in the estimation of central bank reaction function.