The Effectiveness Research Of China’s Central Bank Foreign Exchange Market Intervention

In the Bretton Woods period, the monetary authorities of the Member States havetaken the foreign exchange market intervention as the basic policy tools to maintainexchange rate parity and stability through the foreign exchange marketintervention.Since the Bretton Woods collapsed in1970s,most countries introduced afloating exchange rate system,foreign exchange market intervention have becomeincreasingly frequent.After1980s,although some governments and economistsquestioned effectiveness of foreign exchange market intervention,and the theoreticaldebate has never stopped,but the foreign exchange market intervention by centralbanks is still an important tool to implement rate policy.After three times exchangerate system reform in1994,2005and2010,China’s RMB exchange rate is in thetransition of current account convertibility to gradually reduce controls under capitalaccount,and ultimately achieve the fully convertible of RMB.Reference to a basket ofcurrencies,based on the market,increased the flexibility of exchange rate are the mainfeatures of the new RMB exchange rate formation mechanism,the foreign exchangemarket intervention will be an important policy tool of central bank. China’s centralbank foreign exchange market intervention in the system with the appropriatebackground and characteristics,in case of non-full market interest rates and foreignexchange markets is not perfect, the linkage between interest rates and exchange ratesdoes not exist, Also for the maintenance of domestic monetary policy to maintaineconomic balance and independence requirements,China’s central bank usingsterilized intervention in foreign exchange market intervention model, and its rolemainly the portfolio balance channel.In this paper,based on the standards of foreignexchange rate and profit,try to analysis the effectiveness of foreign exchange marketintervention,we test and verify the feasibility of the portfolio balance channel,andexamine the crowding-out effect of the intervention operation, built the country’sforeign exchange market intervention for profit model and estimated profitability ofcentral bank intervention, with a view to a comprehensive analysis of theeffectiveness of China’s central bank foreign exchange market intervention, and acomplete set of China’s central bank foreign exchange market intervention policyrecommendations.This paper studies the effectiveness of foreign exchange marketintervention empirical during1994to2010,prove feasibility of portfoliobalance channel,examine the crowding-out effect of central bank’s sterilization operations,andestimates of the profitability of central bank’s intervention.The results suggest thatcentral bank’s foreign exchange market intervention is effective, but the interventionin heavy losses.In general, the central bank foreign exchange market intervention iseffective,but at the same time, there are characteristics of passive in interventi onoperations, unsustainable in sterilization operations and great losses of intervention,with the further enhancement of the RMB exchange rate flexibility and gradualrelaxation of exchange controls, effectiveness of central bank intervention insterilization operations on crowding-out effect will gradually increase, and there willbe a serious impact on monetary policy independence. Finally,this paper give advicesthat in order to improve our central bank foreign exchange market intervention, Weshould promote the reform of RMB exchange rate formation mechanism,formatereasonable goals of foreign exchange market intervention,improve the mode offoreign exchange market intervention,establish the Exchange Stabilization Fund.