Monetary policy transmission with two exchange rates of a single currency: The Chinese experience

Qing He, Iikka Korhonen and Zongxin Qian

International Review of Economics & Finance, 2021, vol. 75, issue C, 558-576

Abstract: In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an onshore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.

Keywords: CNY; CNH; Monetary policy; Capital controls (search for similar items in EconPapers)
JEL-codes: E52 F31 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:75:y:2021:i:c:p:558-576

DOI: 10.1016/j.iref.2021.04.028

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