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Central Bank Financial Strength And The Cost Of Sterilization In China

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  • Ljungwall, Christer

    ()
    (China Economic Research Center)

  • Xiong, Yi

    ()
    (Peking University National School of Development, China Center for Economic Research)

  • Zou, Yutong

    ()
    (Peking University National School of Development, China Center for Economic Research)

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    Abstract

    This paper investigates the current monetary policy regime of China’s Central Bank, the People’s Bank of China (PBoC). This is done from the specific viewpoint of PBoC financial strength and the cost of its monetary policy instruments. The result shows that PBoC is constrained by the costs of its monetary policy instruments. PBoC tend to use less costly but market-distorting instruments such as deposit interest rate cap and reserve-ratio requirements, rather than more market-oriented but more costly instruments such as central bank note issuance. These costs remain under control today, but may rise in the future as PBoC accumulates more foreign assets. This, in turn, will jeopardize the Chinese monetary authority’s capability to maintain price stability.

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    File URL: http://swopec.hhs.se/hacerc/papers/hacerc2009-008.pdf
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    Bibliographic Info

    Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2009-8.

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    Length: 30 pages
    Date of creation: 01 May 2009
    Date of revision:
    Handle: RePEc:hhs:hacerc:2009-008

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    Postal: China, Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
    Phone: +46-8-736 90 00
    Fax: +46-8-31 81 86
    Web page: http://www.hhs.se/CERC/
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    Keywords: Central banking; Monetary policy; China;

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    1. Joshua Aizenman & Nancy Marion, 2002. "The high demand for international reserves in the Far East: what's going on?," Pacific Basin Working Paper Series 2002-08, Federal Reserve Bank of San Francisco.
    2. Thomas F. Cargill, 2005. "Is the Bank of Japan's Financial Structure an Obstacle to Policy?," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 311-334, September.
    3. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
    4. Kenneth Kletzer & Mark Spiegel, 1999. "Sterilization costs and exchange rate targeting," Pacific Basin Working Paper Series 99-03, Federal Reserve Bank of San Francisco.
    5. Peter Stella, 2002. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Working Papers 02/137, International Monetary Fund.
    6. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
    7. Alain Ize, 2005. "Capitalizing Central Banks," IMF Working Papers 05/15, International Monetary Fund.
    8. Rose, Andrew K, 2000. " A Review of Some of the Economic Contributions of Robert A. Mundell, Winner of the 1999 Nobel Memorial Prize in Economics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(2), pages 211-22, June.
    9. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
    10. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
    11. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, vol. 87(2), pages 283-312, February.
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