Sterilized Intervention, Bank Credit, and Chinese Monetary Policy

55 Pages Posted: 6 Dec 2016 Last revised: 6 Jul 2021

See all articles by Wukuang Cun

Wukuang Cun

Shanghai University of Finance and Economics - Department of Finance

Jie Li

Central University of Finance and Economics (CUFE)

Date Written: May 15, 2019

Abstract

We study a liquidity management channel through which sterilized foreign exchange intervention can affect bank lending and the real economy. In the model, the central bank holds foreign reserves and sterilizes its foreign asset purchases by issuing central bank bills that are liquidity management instruments for commercial banks. Sterilized intervention can affect bank lending by altering the supply of liquidity management instruments, which is referred to as the liquidity management channel. We use the model to study the optimal foreign exchange intervention policy in response to portfolio flow shocks and the optimal choice of sterilization instruments. The infinite horizon version of the model is calibrated to the Chinese economy and can explain the observed co-movements of foreign reserves, central bank bills and bank lending.

Keywords: sterilized intervention, liquidity management, bank credit, reserve requirement regulation, monetary policy, China

JEL Classification: E58, E51, F3

Suggested Citation

Cun, Wukuang and Li, Jie, Sterilized Intervention, Bank Credit, and Chinese Monetary Policy (May 15, 2019). USC-INET Research Paper No. 19-10(R), Available at SSRN: https://ssrn.com/abstract=2880873 or http://dx.doi.org/10.2139/ssrn.2880873

Wukuang Cun (Contact Author)

Shanghai University of Finance and Economics - Department of Finance ( email )

Shanghai, 200433
China

Jie Li

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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