An Empirical Study On The Relationship Between Short-term Capital Flow And Monetary Policy

With the deepening development of financial globalization,the impact of short-term capital flows and the scope of the trend has become increasingly fierce,short-term capital flow direction confusing,fluctuations in fluctuations in the size of the flow.Since joining the World Trade Organization in 2001,there has been a’double surplus’ in China,which has led to a surge in foreign exchange reserves.Due to the capital account controls and the restrictions on the sale and purchase of foreign exchange,the central bank needs to balance out the foreign exchange position in the foreign exchange market,while in the domestic money supply to offset excessive foreign exchange,this passive situation seriously damaged the independence of Monetary Policy.In order to resist this external shock and thus maintain the internal balance,the central bank need to use a variety of monetary policy tools to mitigate such adverse effects,such as the issuance of central bank bills and raising the statutory deposit reserve ratio,both of them are the central bank passive response to upstream floods.Since 2014,the upper reaches of the water gradually reduced,the emergence of signs of sea water intrusion,flood storage task reversal,the role of drought in the water surface.Water level stability is controllable,but do not rise or fall reversal is intriguing,a sudden change will disrupt the original response measures,even panic.The steady flow of water upstream is not terrible,unexpected sea water intrusion is endless trouble.Capital flows,such as foreign direct investment and medium-and long-term external debt,are not frightening,given their determinism and testability,the central bank can prepare to it ahead of time;while volatile short-term capital flows are difficult to pin down,which would seriously interfere with the implementation of the central bank policy objectives.During the Asian financial crisis,the abrupt reversal of short-term capital flows was unexpected,leading to the failure of monetary policy in Southeast Asian countries and eventually leading to the financial crisis.In 1990s,several financial crises appear in the eye,in response to short-term capital flows to the monetary policy disadvantage Influence,we have to take precautions.Therefore,it is imminent to study the impact of its short-term capital flows on China’s monetary policy.Short-term capital frequent in and out of China will disrupt economic development and financial market order,increase the difficulty of the operation of monetary policy,and even lead to financial crisis.Therefore,it is necessary to find out the characteristics of short-term capital flow,find out the factors that affect the short-term capital flow,and then measure its impact on monetary policy,and finally find the countermeasures.This article has the following findings.First,through the Mundell Fleming model,we find that short-term capital outflow will affect the effect of monetary policy in the current situation of devaluation expectations.Specifically,the expansion of monetary policy will be weakened by capital outflows,tightening of the monetary policy will be strengthened by capital outflows,prudent monetary policy will become tight.Therefore,the central bank should pay special attention to the impact of short-term capital outflow on monetary policy,and pinpoint the role of statutory deposit reserve in the money supply.Second,the Markov Regime Switching Model confirms the notion that since June 2014 China has entered the stage of large-scale outflow of short-term capital,this trend will not change in the short term.Third,the non-parametric Granger causality test finds that short-term capital flows affect capital market,inflation rate and money supply growth rate.It also proves that there is a nonlinear relationship between short-term capital flows and monetary policy variables,this non-linear depend on the ratio of Sino-US interest rates.And pointed out that the interest rate increase is expected to rise in the case of the United States,China and the United States will reduce the difference in interest rates,short-term capital arbitrage purposes weakened,coupled with the expected depreciation of the RMB,short-term capital will flow out of China.Finally,it gives policy recommendations on the impact of monetary policy on short-term capital flows,including the following aspects,to monitor of short-term capital flows,to promote the process of interest rate liberalization and coordination of interest rates,to promote the RMB exchange rate marketization process and effective management of exchange rate expectations,to ensure the independence of money supply to prevent short-term impact of capital on capital markets.