Monetary sterilization response to the movements in exchange rates and official net foreign assets: a case of China

Ying Wu ()
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Ying Wu: Perdue School of Business, Salisbury University

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 2, No 13, 838 pages

Abstract: Abstract This paper separates the exchange rate effect of monetary sterilization from the scale effect as a rationale for a modification of the measure of sterilization rate. The Chinese episode for 2002–2012 is characterized by a robust trend both for renminbi to appreciate vis-à-vis the dollar and for net official foreign assets to grow, which relates two of four scenarios that I generally identify for possible sterilization responses to changes in the exchange rate and official net foreign assets. I find that the modified sterilization rate in China exhibits a sort of strong “hawkish bias” in which sterilization is more sensitive to the exchange rate appreciation than to its depreciation, on one hand, and to the growth of net official foreign assets than to its decline, on the other. While there is no econometric evidence for the “hawkish bias” in the long run, the significant evidence exists for the short-run asymmetry of sterilization adjustment to be biased more toward the hawkish side than dovish side.

Keywords: Monetary sterilization; Exchange rates; Net foreign assets; Cointegration (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-022-01113-4

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