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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2019, Vol. 14 Issue (4) : 604-628    https://doi.org/10.3868/s060-008-019-0024-2
Orginal Article
Sustainability of Monetary-cum-Exchange Rate Policy in China
Hiroya Akiba()
Waseda University, Shinjuku, Tokyo 169-8050, Japan
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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.

Keywords sustainability      monetary-cum-exchange rate policy      impossible trinity      sterilized intervention      capital inflow     
Issue Date: 17 January 2020
 Cite this article:   
Hiroya Akiba. Sustainability of Monetary-cum-Exchange Rate Policy in China[J]. Front. Econ. China, 2019, 14(4): 604-628.
 URL:  
http://academic.hep.com.cn/fec/EN/10.3868/s060-008-019-0024-2
http://academic.hep.com.cn/fec/EN/Y2019/V14/I4/604
[1] LI Tiandong, XUE Shaoqiang, ZHU Qi. The directions of FDI and the self-intensifying expectations of the exchange rate and the effectiveness of sterilized intervention[J]. Front. Econ. China, 2006, 1(2): 207-219.
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