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Neutralization in China: evidence from the balance sheet of the People’s Bank of China

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  • Zhuo Tan
  • Shenggang Yang

Abstract

We evaluate China’s neutralization policy by monthly estimations based on the central bank balance sheet from 1999:6 to 2011:6. Our results suggest that China effectively neutralizes 66% of the change of net foreign assets under a pegged currency regime. Consequently, a purchase of one yuan of net foreign assets leads to an effective increase of 1.4 yuan in the money supply, rather than 4 yuan in the absence of neutralization. In the face of rapid growth of foreign reserves, neutralization in China is becoming increasingly difficult, consistent with Mundell’s hypothesis.

Suggested Citation

  • Zhuo Tan & Shenggang Yang, 2012. "Neutralization in China: evidence from the balance sheet of the People’s Bank of China," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 15(1), pages 25-31, March.
  • Handle: RePEc:taf:jpolrf:v:15:y:2012:i:1:p:25-31
    DOI: 10.1080/17487870.2012.647776
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    Cited by:

    1. Rumiana GÓRSKA, 2014. "Balance Sheet of a Central Bank – A Source of Information about the Economic Position of a Country. A Comparative Study of USA and China," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(4), pages 497-504, October.
    2. Fungáčová, Zuzana & Nuutilainen, Riikka & Weill, Laurent, 2016. "Reserve requirements and the bank lending channel in China," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 37-50.

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