An analysis of the effectiveness of China’sRMB sterilization policy

• Main Authors: Wei-Chen Wu, 吳維晨
• Other Authors: David Kleykamp
• Format: Others
• Language: zh-TW
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/81422412539421860548

碩士 === 淡江大學 === 經濟學系碩士班 === 100 === During the period 2000-2011, both China’s current account and financial account showed significant surpluses. The concomitant rapid rise in foreign exchange reserves mirrored tremendous growth in the real economy, eventually establishing China as the world’s largest holder of foreign exchange reserves. However, the speed and magnitude of the accumulation of these reserves brought with it persistent dangers of inflation and bubbles in asset prices. The government of China, seeing these dangers as significant, engaged massive sterilization operations in an effort to control the growth of money in the economy. The goal of this thesis is to statistically investigate the effectiveness of China’s sterilization operations. In this study, the sample period can be broken into two sub-periods corresponding to two different exchange rate regimes – a fixed exchange rate policy during 2000-2005 and a managed exchange rate policy regime during 2005 – 2011. The role of the Tinbergen’s Rule in analyzing the effectiveness of sterilization policies is seen to be important. Tinbergen’s Rule says that the number of policy instruments should be equal to the number of policy targets. Since effective monetary control requires a control of the money multiplier, as well as control of the monetary base, sterilization policies should employ at least two instruments. In the case of China these instruments have been the quantity of sterilization bonds and the required reserve ratio. The empirical results of the thesis show that during the fixed exchange rate policy of 2000-2005, monetary sterilization was not particularly stable. Sterilization was difficult to maintain during this time. This is one reason why that Chinese exchange rate policy changed from a strictly fixed rate to a managed rate. Regression analysis indicates that the effectiveness of sterilization operations was not high, possibly because of sterilization costs which continued to rise over the period. Several policy targets, control variables, and lagged specifications were introduced into the model including a measure of the percentage change in Chinese housing prices and a variable assessing political pressure from US government officials. The thesis concludes that sterilization is not a long run option for China; and that a timely appreciation can slow the increase in foreign reserves, thus relieving inflationary pressures on the economy.