Study On The Effect Of China Monetary Policy Under International Capital Flows

Since the1990s, with the rapid development of world economy globalization andscience and technology, the total size of international capital flows expanded rapidly,showing more speed and diverse forms characteristic. International capital flows don’tonly bring in opportunities for a country’s development, but also produce a certainnegative impact.A large number of international capital inflows and outflowsincrease the risk of a country’s economy, and weaken the effectiveness of nationalmonetary policy, and even cause the financial crisis. In recent years, The capitalprofit-seeking prompted a large number of international capital continue to flow intoChina through several ways, RMB is facing the pressure of appreciation。The centralbank must stand ready to intervene in the foreign exchange market to prevent theappreciation of the RMB, leading to the increase of money supply, increasing thedomestic excess liquidity, monetary policy effectiveness is reduced. Therefore, thearticle has important practical significance, which can provide a reference to improvethe effectiveness of monetary policy.Firstly, the article started from the impact of international capital flows onmonetary policy, and expounded the theory of international capital flows under themonetary policy transmission mechanism, and deeper analysis of the methods ofinternational capital flows to monetary policy. It provided a monetary policy referencefor monetary authorities. Then, we built a revised offset coefficient model, whichused data to reflect the impact of international capital flows on monetarypolicy.Lastly, we selected40data from the first quarter of2001to the fourth quarterof2010,and built a seven-variable VAR mode to test the impact of internationalcapital flows on the effectiveness of monetary policy.The results showed that international capital flows had long-term effects onoutput, exchange rate, money supply, asset prices, and domestic credit. From theequation estimation results, offset coefficient is-0.39, which showed that about40%effects of monetary policy, was offset by international capital flows, and theeffectiveness of monetary policy has been seriously weakened. In last, we giverecommendations to improve the effectiveness of monetary policy, such as, flexibleusing of various monetary policy tools to decrease the impact of international capital flows, speeding up the relaxation of capital account controls, to improve theregulatory standards of international capital flows, and to strengthen internationalcoordination of monetary policy.