The Allalvsis Of Sterilized Intervention Of The Central Bank In China

Sterilized Intervention is usually defined that in order to intervene in the foreign market to control the national currency exchange rate(or to smooth the exchange rate fluctuations), a nation’s central bank use other monetary policy tools to sterilize the intervention in the operation of the domestic money supply.Since January1st1994, China has began to adopt the choice of the compulsory buying-selling exchange mechanism and the floating foreign exchange management which is based on supply and demand in the foreign exchange market. With the sharp increase of China’s foreign exchange reserves, the People’s Bank of China had to issue a lot of base money to recover the foreign exchange and this greatly enhanced the endogeneity of China’s money supply. As a result, foreign exchange has become the main channel for the issuance of currency in China, which seriously affects the effectiveness and the autonomy of the Central Bank’s monetary policy. The expanding foreign currency, which lead to the rapid growth of China’s money supply,brought tremendous pressure on the Central Bank to stabilize the domestic price level. In order to guard against the domestic inflation and maintain the stability of the RMB exchange rate, the Central Bank had to conduct the sterilized intervention to recover the monetary base. Its specific operations includes open market operations, loans to financial institutions.statutory deposit reserve ratio adjustment and other means. However, the current sterilization operations taken by the Central Bank of China are lack of persistence and efficiency.Therefore, how to prove the efficiency of sterilized operations has been a real challenge for our central bank.This paper adopts the Mundell-Fleming Model in a fixed exchange rate regime and uses the Central Bank’s balance sheet to explain the theoretical principle of the sterilized intervention. By dividing the practice of Central Bank’s sterilized intervention into five parts, this paper analyses different characteristics and evaluate the effectiveness of the sterilized operations. This article combines the actual data and the theory model to discuss the efficiency of China’s sterilized intervention tools especially the Central Bank Bill and the statutory deposit reserve ratio which are the most frequency used tools in recent years. Through these analysis, this article summarizes the current problems and deficiencies of the present sterilized intervention operations and makes practical recommendations on the improvement of China’s foreign exchange intervention mechanism.This article uses VAR model and selects quarterly data from the first quarter of2001to the second quarter of2012to make empirical analysis of the effectiveness of China’s sterilized intervention. Moreover, the modification of the Fisher Equation has also been used to calculate the results of Central Bank’s intervention.This article is divided into six sections::the first part introduces the background of the topic.the review of domestic and international research results, the approach adopted in the article and the innovative methods in this paper. The second part mainly tells the theoretical knowledge background and the main operation tools. The third part analyzes the concrete practice of China’s sterilized operations since1994. The fourth part analyzes the effectiveness of statutory deposit reserve ratio and issuing central bank bills. The fifth part uses empirical model to test the validity of sterilized operations of central bank and the sixth part put forward the practical proposals to improve the exchange management system and the usage of foreign exchange reserves.