Foreign Exchange Interventions, Capital Controls and Monetary Policy: The Case of China

Hao Jin ()

No 2015-019, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: China has maintained a closed capital account to the private sector and channeled capital flows through the public sector by foreign exchange interventions. This paper presents an open economy model that incorporates this capital account policy configuration in order to study whether foreign exchange interventions can improve welfare in the presence of capital controls, compared to an open capital account. Furthermore, I analyze how these interventions affect the conduct of monetary policy. I find that optimal interventions improve welfare by strategically managing the terms of trade. In the presence of domestic nominal rigidity, interventions increase welfare even if monetary policy is set optimally. I find monetary policy effectively eliminates domestic price distortions, while foreign exchange interventions efficiently correct terms-of-trade externalities.

Keywords: Foreign Exchange Interventions; Capital Controls; Monetary Policy; Chinese Economy; Welfare (search for similar items in EconPapers)
JEL-codes: D6 E52 F31 F38 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-10
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2015019

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