Target, Mechanism And Effectiveness Of Foreign Exchange Intervention Under Capital Account Liberalization

This paper deeply analyzed the objectives, methods and effectiveness of China's FX interventionin the process of capital account liberalization and established a general equilibrium analysisframework of equilibrium exchange rates and exchange rate determination in the context ofinternational capital flows. Then, in the analysis framework, the paper set up a theory model withthe capital account openings index. Based on it, the currency intervention theory and model areestablished. The paper also researched the optimal reaction function in the currency interventionfrom the perspective of welfare loss function and the currency determination. In the internationalresearch work, the author took the U.S., Japan and Brazil as the main objects and analyzed theirobjectives, operation mechanisms and effectiveness, etc, in the different stages of economicdevelopment and macroeconomic policy environment. This paper researched the tactics,objectives, effectives of FX intervention in China and established the reaction function based on anempirical study. After describing the process of China's capital account opening and the capitalaccount openness degree measures, this paper also analyzed the tactics, objectives and effectives ofFX intervention in China and monetary policy coordination under the condition of capital accountopening.The research methods of this paper include analysis and empirical study, comparative andhistorical experience research and mathematical modeling research. In the analysis of the world'smajor economies and China's FX intervention in the process of capital account liberalization, weestablished theoretical models and empirical evidence on the basis of historical experience.This study suggests that there are significant interactions among capital-account liberalization,exchange rate market-orientation and interest rate market-orientation. After the opening of capitalaccount, coordination of capital flows, foreign exchange intervention and monetary policy willbecome more prominent, so the RMB exchange rate system further market balance will be the key.In this regard, this article makes the following policy recommendations: an incremental advancecapital account opening; perfecting the system of macro-prudential supervision, establishing anmulti-level and market-oriented tool system under open economy to the regulate the internationalcapital flow. Accompany the gradual liberalization of the capital account, coordinated advancingexchange rate and interest rate market-oriented reform; In the context of capital account openingand the marketization of interest rate and exchange rate,we need to relocate our foreign exchangeintervention policy objectives and promote intervention objectives gradually shifting to a stablemarket order; further enhancing the independence of monetary policy; strengthening monetarypolicy credibility and the credibility of the Monetary Authority; Strong supporting for Hong Kong'sRMB offshore market development and promotion of Renminbi cross-border settlement in tradeand investment; accelerating the development of domestic financial markets and the construction ofinfrastructure systems.The main innovation of this article made two points: first, redefined "equilibrium exchangerates" and established general equilibrium models in open economies with capital account openness index as a measure of capital account liberalization in different periods. At the? same time,respectively, from the perspective of welfare loss function and the perspective of exchange ratedetermination disscussed the Central Bank's optimal exchange reaction function. Second, throughthe empirical research methods establishing a Central Bank's reaction function of foreign exchangeintervention in China.The shortage of this paper is limited to my high-frequency data and earlyyear's data, which will be further studied in the future.