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Monetary policy transmission with two exchange rates of a single currency: The Chinese experience

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  • He, Qing
  • Korhonen, Iikka
  • Qian, Zongxin

Abstract

In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an onshore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.

Suggested Citation

  • He, Qing & Korhonen, Iikka & Qian, Zongxin, 2021. "Monetary policy transmission with two exchange rates of a single currency: The Chinese experience," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 558-576.
    • Handle: RePEc:eee:reveco:v:75:y:2021:i:c:p:558-576
    DOI: 10.1016/j.iref.2021.04.028
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    Cited by:

    1. Qin, Weiguang & Bhattarai, Keshab, 2022. "Influence of Hong Kong RMB offshore market on effectiveness of structural monetary policy in the Mainland China," MPRA Paper 111768, University Library of Munich, Germany, revised 30 Jan 2022.

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    More about this item

    Keywords

    CNY; CNH; Monetary policy; Capital controls;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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