The Research Of The Impact Of Exchange Market Pressure On The Effectiveness Of Chinese Monetary Policy

During the past decade, with attracting substantial foreign investment as well as a large number of exportation, China has obtained a lot of foreign exchange reserves, which helps to increase its total wealth and enhance China’s voice in the world. However, the increaseing of foreign exchange reserves of the central bank not only puts forward new requirements on the foreign exchange management, but also has a great influence on the Chinese monetary policy, which is reflected by the weakening of the independence and effectiveness of monetary policy. We can see that large inflows of foreign exchange, making the central bank passively issue a large number of currencies, which will result in an increasing number of base money supply and liquidity in China’s monetary market. All the factors above have made the development of China’s monetary policy as well as its implementation are different from the situation when carried out under conventional conditions, and also different from other countries, including other emerging economies. First of all, a lot of foreign exchange inflows reduce the ability of central bank’s initiative to regulate the money supply. Secondly, the central bank must control prices and avoid vicious inflation, which may cause social instability.Thirdly, the United States and other countries blamed the rising national unemployment rate on the undervalue of RMB exchange rate, and calls for the appreciation of the RMB, which has brought pressure on the RMB appreciation; however unilateral RMB appreciation trend has led to the influx of international hot money; All of these result in a vicious cycle of China’s currency market.Therefore, analyzing the reason, approache and results of the influence of foreign exchange on the effectiveness of monetary policy has a very practical significance in how to choose a good Chinese monetary policy, which will lead the Chinese economy to a stable and healthy development. This paper has discussed the current situation of Chinese EMP, and its existing monetary policy tool.Through the use of relevant economic data from2001, this essay creat an index (EMP) to measure China’s foreign exchange market pressur, and construct a indicator to quantify the effectiveness of monetary policy, analyse the impact of the foreign exchange market pressures on the effectiveness of China’s monetary policy by statistical methods, and establish a specific regression model to quantify the impact. Finally, thinking of the actual situation of China’s monetary policy and its external factors this eassy put forward three suggestions on the future monetary policy options which can help policy makers to formulate a much suitable future monetary policy for Chinese market.