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Capital controls and optimal Chinese monetary policy

  • Chun Chang
  • Zheng Liu
  • Mark M. Spiegel

We examine optimal monetary policy under prevailing Chinese policies> – including capital controls, nominal exchange rate targets, and costly sterilization of foreign capital inflows. China’s combination of capital controls and exchange rate pegs disrupts its monetary policy, precluding adjustments that could maintain macroeconomic stability following a set of shocks that mirror its experience during the global financial crisis. However, comparing different policy regimes in a consistent DSGE framework, we find that the bulk of welfare gains achieved under full liberalization can be obtained by liberalizing either the capital account or the exchange rate. ; Previously titled: Monetary policy in a DSGE model with “Chinese Characteristics”

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-13.

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Date of creation: 2013
Handle: RePEc:fip:fedfwp:2012-13
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