The passage analyzes the mechanism of sterilization in use of theportfolio balance model, and tests the effectiveness of sterilization inchina. The outcome indicates that the cointegration relationship betweenthe foreign reserve and money supply contradicts to the prediction of themodel, i.e. there is no passive-growth relationship between them. And theGranger causality test indicates that the growth of foreign reserve is notthe reason for the growth of money supply. Based on the tests, it isconcluded that the sterilization of central bank in china is effective. |