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Central bank financial strength and the cost of sterilization in China

  • Ljungwall, Christer
  • Xiong, Yi
  • Yutong, Zou
Registered author(s):

    Using a unique monthly data set over the period 2000:1–2008:12, this paper presents empirical findings on China's central bank, the People's Bank of China, from the viewpoint of its financial strength and the cost of monetary policy instruments. The results show that PBoC is constrained by the costs of its monetary policy instruments. PBoC tend to use less costly but market-distorting instruments such as the 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://www.sciencedirect.com/science/article/pii/S1043951X1200020X
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    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 25 (2013)
    Issue (Month): C ()
    Pages: 105-116

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    Handle: RePEc:eee:chieco:v:25:y:2013:i:c:p:105-116
    Contact details of provider: Web page: http://www.elsevier.com/locate/chieco

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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. Keltzer, K. & Spiegel, M., 1999. "Sterilization Costs and Exchange Rate Targeting," Papers pb99-03, Economisch Institut voor het Midden en Kleinbedrijf-.
    3. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc.
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    6. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
    7. Marvin Goodfriend & Eswar Prasad, 2006. "A Framework for Independent Monetary Policy in China," IMF Working Papers 06/111, 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. 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.
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