Sterilized Intervention and Optimal Chinese Monetary Policy

Cun, Wukuang; Li, Jie

doi:10.2139/ssrn.2880873

Cited by 4 publications

(1 citation statement)

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“…unanticipated operations or via a preannounced rule) to affect volatility of the exchange rate and the transmission mechanism of the interest rate and found that: central bank intervention has a strong interaction with monetary policy in general equilibrium; central bank intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel and there are some trade-offs in the use of central bank intervention since it can help isolate the economy from external financial shocks, but it prevents some necessary adjustments to the exchange rate as a response to nominal and real external shocks. Cun and Li (2016) showed that both M2 and bank credit had significantly increased during the sterilized intervention period, regardless of monetary base being kept unaffected, implying an increase in money multiplier. As banks' holdings of central bank bills increase, they hold less excess reserves, leading to a higher money multiplier and expansions of banks' balance sheets.…”

Section: Introductionmentioning

confidence: 99%

Central Bank Intervention in the Inflation Targeting

Krušković¹

2022

Journal of Central Banking Theory and Practice

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This paper analyses the impact of central bank interventions in the inflation targeting regime. The results of empirical studies in this paper show if there is a shock of the exchange rate, which would lead to depreciation of the exchange rate, a central bank may decide to mush instability on the foreign exchange market with foreign exchange interventions, thereby preventing the sudden exchange rate depreciation, which would then require a smaller reaction by the interest rate. Namely, through foreign exchange interventions, the central bank greatly absorbs the depreciation shock and, consequently, inflation is lower. As a result of lower price growth, the need for a monetary policy response to an interest rate is also lower. Based on this example, we can see that central bank intervention in some cases can be very useful in order to correct disturbances in the foreign exchange market. Therefore, some central banks accumulate foreign exchange reserves at a very high level so as to have enough space for foreign exchange intervention, without the risk of falling foreign exchange reserves below the optimum level.

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Section: Introductionmentioning

confidence: 99%

Central Bank Intervention in the Inflation Targeting

Krušković¹

2022

Journal of Central Banking Theory and Practice

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Sterilized interventions and capital controls

Prasad

2018

Journal of International Money and Finance

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Reserve requirements and optimal Chinese stabilization policy

Chang

Liu

Spiegel

et al. 2019

Journal of Monetary Economics

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We build a two-sector DSGE model to study reserve requirement adjustments, a frequently-used policy tool for macro-stabilization in China. State-owned enterprises (SOEs) are financed by government-guaranteed bank loans, which are subject to reserve requirements, while private firms rely on unregulated off-balance sheet financing. Increasing reserve requirements reallocates resources to more productive private firms, raising aggregate productivity, but also raises the incidence of SOE bankruptcy. Optimal reserve requirement adjustments are complementary to money supply adjustments for improving macroeconomic stability and welfare. However, welfare gains are greater under sector-specific productivity shocks, which call for resource reallocation, than under aggregate productivity shocks.

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Sterilized Intervention and Optimal Chinese Monetary Policy

Cited by 4 publications

References 46 publications

Central Bank Intervention in the Inflation Targeting

Central Bank Intervention in the Inflation Targeting

Sterilized interventions and capital controls

Reserve requirements and optimal Chinese stabilization policy

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