A Study On Currency Adjustment For Capital Opening

Optimal distribution of financial resources cannot be apart from financial liberalization and capital opening. With capital flowing in the worldwide, the civil economic variables such as economic growth rate, employed (unemployed) rate and price level will change, so do the external economic variables such as balance of payments, foreign reserves, exchange rates and so on. To some extent, the currency adjustments controlled by the central bank may adjust the direction of capital flow and influence the operation of the economy, which would make the economy recover to normality at a quicker rate. For a long time the central bank in China has been adjusting currency under the circumstance in which the capital market is close relatively, the operation tools are relatively simple and the conductive mechanisms are not fluent. At the same time, we will have to be confronted with dual tasks of adjusting currency for both internal and external purposes after capital opening. On this premise, the paper gives a detailed clarification from the theories about capital opening and currency adjustment to foreign practice experiences and tuitions in currency adjustment, and researches into the adjustment problems out of the current situation in capital opening in our country. On the basis of macroeconomics, international economics, currency and banking theories, the paper combines history with reality, theory with practice, and makes use of the knowledge of positive method, for example, econometrics, intending to discover inherent and regular things so that we can realize reasonably and find practical methods for currency adjustment under open capital.The forms and features of the current international capital flow have already changed. The kinds of capital control are increasing but the effect is not comfortable. After opening capital, the internal and external equilibrium will collide. Central banks need to take up policy tools and make use of various conductive mechanisms of monetary policy correctly and flexibly so as to reach the goals needed for currency adjustment, which constitutes the related theoretical clarification described in chapter one in this chapter.The automatic adjustments of market mechanisms come from the inherent strength of economy. Central banks should understand the principle that how market mechanisms act and know the environment the economy is confronted with. In chapter two, on the premise of open capital, we classify capital flow into complete and partial ones, exchange rate system into fixed and floating ones, and open economic bodies into big and small countries. Taking the IS-LM-BP Model as a tool, we give a detailed discussion about the adjustment process of disequilibrium in merchandise market, capital market and foreign exchange market, and we also talk about the efficiency ofmonetary policy under different conditions. Based on different premises, there is distinction in the conclusions between Monetary Model and Assets Portfolio Model regarding the effect of sterilized intervention. The former believes that the sterilized intervention is ineffective but the later takes adverse viewpoint. The IS-LM-BP Model is a flow model and it insists that the domestic interest rate is the same as the foreign one if the capital flow is complete. This paper comes up with the idea that the interest rates between domestic and foreign countries are not equal. Here four factors are involved: risk stock and its expectancy, substitution of currency, cost of information and transaction, production or provision factor.Since the 70s of last century, many developing countries have reformed to unrestrained finance, and fulfill their currency adjustment directly. Making the positive test for the need of general money and private loans in some countries, we find that in most cases the need for private loans became unstable. Thus the proposal is presented that in order to fulfill currency adjustment, we need to match indirect monetary policy tools with exchange rate policy and adopt some direct adjustment tools as tr...