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Hot Money Inflows in China : How the People's Bank of China Took up the Challenge

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  • Vincent Bouvatier

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    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

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    Abstract

    This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.

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    Bibliographic Info

    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00111153.

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    Date of creation: Feb 2006
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    Handle: RePEc:hal:cesptp:halshs-00111153

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00111153
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    Related research

    Keywords: Hot money inflows; domestic credit; VECM; Granger causality.;

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    Cited by:
    1. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, Elsevier, vol. 20(3), pages 205-224, May.

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