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Monetary sterilization response to the movements in exchange rates and official net foreign assets: a case of China

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  • Ying Wu

    (Perdue School of Business, Salisbury University)

Abstract

This paper separates the exchange rate effect of monetary sterilization from the scale effect as a rationale for a modification of the measure of sterilization rate. The Chinese episode for 2002–2012 is characterized by a robust trend both for renminbi to appreciate vis-à-vis the dollar and for net official foreign assets to grow, which relates two of four scenarios that I generally identify for possible sterilization responses to changes in the exchange rate and official net foreign assets. I find that the modified sterilization rate in China exhibits a sort of strong “hawkish bias” in which sterilization is more sensitive to the exchange rate appreciation than to its depreciation, on one hand, and to the growth of net official foreign assets than to its decline, on the other. While there is no econometric evidence for the “hawkish bias” in the long run, the significant evidence exists for the short-run asymmetry of sterilization adjustment to be biased more toward the hawkish side than dovish side.

Suggested Citation

  • Ying Wu, 2023. "Monetary sterilization response to the movements in exchange rates and official net foreign assets: a case of China," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 821-838, February.
    • Handle: RePEc:kap:rqfnac:v:60:y:2023:i:2:d:10.1007_s11156-022-01113-4
    DOI: 10.1007/s11156-022-01113-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary sterilization; Exchange rates; Net foreign assets; Cointegration;
    All these keywords.

    JEL classification:

    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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