The Impacts of Foreign Exchange Reserves Intervention under the Case of Capital Control in China

41 Pages Posted: 18 Feb 2021

See all articles by Cheng Zhou

Cheng Zhou

Xi'an University of Technology

Date Written: January 9, 2021

Abstract

This paper studies the impacts of foreign exchange reserves intervention under the economic structures of China that feature capital controls, managed floating exchange rate and partially sterilized intervention. The central bank transacts government bonds to sterilely intervene the foreign exchange market in order to maintain a managed float regime. The results show that under the managed float regime, compared with capital account liberalization, a higher degree of capital controls may increase output and consumption and stabilize exchange rate and foreign exchange reserves in the short term. But under the case of the fixed exchange regime and capital controls, the impacts of full sterilization intervention and non-sterilization intervention are almost the same. Relative to the full floating exchange rate regime, the implementation of a managed floating exchange rate for the China’s central bank may stabilize the fluctuation of the nominal exchange rate, but it may expand the economic fluctuations, fluctuations in the scale of foreign assets held by the central bank and the scale of government bonds held the private.

Keywords: Capital control; Sterilization intervention; Financial stability; Exchange rate regime; China

JEL Classification: G15; F32; E52; F41

Suggested Citation

Zhou, Cheng, The Impacts of Foreign Exchange Reserves Intervention under the Case of Capital Control in China (January 9, 2021). Available at SSRN: https://ssrn.com/abstract=3763027 or http://dx.doi.org/10.2139/ssrn.3763027

Cheng Zhou (Contact Author)

Xi'an University of Technology ( email )

Xi'an
China

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