The Motivation Of Large-scale Continuous Sterilisation, Limiting Factors And Effectiveness

Since the financial crisis in Asia in1997, China and Asian Emerging Markets Economies (EMEs) experienced a process of huge foreign exchange reserve accumulation. The objective area applied sustained sterilized intervention on large scale to weaken exchange rate and release inflation pressure. The recent global financial crisis brought a new environment to every monetary authority. In this context, it is necessary to investigate the past behavior of objective area.This paper investigates the sterilization policies of China and Asia EMEs on three demotions, say, the Motion, Limitation and the Efficiency of sterilization. To understand the sterilization’s motion, this paper forwards a "three level" analytical framework, which could help the reader understand how the motions are transferred into actions, and how fast the transform would take place. This paper makes a further investigation on the cost of sterilization. Cost is a link between the motion and the efficiency. This paper finds that, four year ago, it was getting hard for objective area to carry sterilization on the large scale which they had been applying since1997. Thanked to liquidity reducing which caused by the recent global financial crisis, it is not that expensive and tough for objective area’s sterilization policies. However, things changed quickly. The capital flowed in and out from objective area quickly, which makes they changing the sterilization scale and even directions much more frequently than even. This paper investigates a vector of China and Asia EMEs macroeconomic data in the last decade to assess the new trend of their sterilized intervention monetary policy’s efficiency by using OLS regression and the simultaneous equation model. The result from econometric section firmly supports the above analysis.Comparative analysis is across the paper, which helps a lot for developing new insights.