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Sustainability of Monetary-cum-Exchange Rate Policy in China

Author

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  • Hiroya Akiba

    (Waseda University, Shinjuku, Tokyo 169-8050, Japan)

Abstract

This paper theoretically considers the long-run sustainability of China's monetary-cum-exchange rate policy under the impossible trinity. Two different models are examined: One sterilizes current net foreign assets (NFAs) and the other focuses on NFAs realized in the previous period. Under the de facto opening of financial flows, sterilization yields a negative risk premium in uncovered interest parity (UIP) that triggers a feedback increase among capital inflows. Here, stability depends on the magnitudes and the combination of structural and policy parameters. It is shown that if current capital inflows are sterilized, the monetary-cum-exchange rate policy in China offers a sustainable solution for exchange rates that are relatively stringently managed. However, such a solution can be obtained for relatively flexible or moderately managed rates if sterilization policy is implemented on the previous period's inflows.

Suggested Citation

  • Hiroya Akiba, 2019. "Sustainability of Monetary-cum-Exchange Rate Policy in China," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 14(4), pages 604-628, December.
    • Handle: RePEc:fec:journl:v:14:y:2019:i:4:p:604-628
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-008-019-0024-2
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    More about this item

    Keywords

    sustainability; monetary-cum-exchange rate policy; impossible trinity; sterilized intervention; capital inflow;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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