A Stydy of the Impact of Foreign Exchange on Conduction of China’s Monetayr Policy
|School||Zhejiang Technology and Business University|
|Keywords||foreign exchange conduction of monetary policy money supply monetary policy tools money multiplier Shibor|
Since2002, caused by the huge balance of payment surplus, our country has been faced with rapid increase of foreign exchange, which has greatly influenced the implement of our own monetary policy. Foreign exchange has become the most important source of money supply. As a result, the conduction of our monetary policy has also exhibited some unique characteristics. For example, the central bank notes became the most dynamic tools and the frequent adjustments of reserve ratio played a very important role. This paper studies how foreign exchange has influenced monetary policy’s conduction. The purpose of this paper is:first to systematically analyze the influence of foreign reserve on conduction mechanism during the past10years and second to provide a foundation for the further revolution of conduction mechanism.This paper totally has5chapters. Chapter1-"Introduction"-summarizes the research background and the importance of study.’Chapter2first compares the two statistical approach of foreign exchange, then analyzes its cause of formation and the main source.In chapter3, this paper makes a detailed analysis of foreign exchange’s impact on each component of conduction mechanism, the order being monetary policy tools、operation targets、intermediate targets. The outcomes are listed below. First, foreign exchange has changed the purpose of using monetary policy tools from actively adjusting base money to passively sterilizing foreign exchange. Second, the large amount of foreign exchange increase leads our central bank to relying heavily on issuing central bank notes and on frequently adjusting required reserve ratio. The refinancing and rediscount tools are therefore neglected. Once the inflow subsides and foreign exchange stops increasing and banks’ excess liquidity no longer loose, the money market will be shocked. Third, foreign exchange has influenced the total and incremental structure of base money. And the frequent use of central bank notes has created a family of money market benchmark rates under central bank issue rate. Fourth, on the one side, foreign exchange has changed the total and incremental structure of M2; on the other side, according to M2=MB*MM, foreign exchange has influenced the money multiplier of M2. This paper provides a theoretical analysis on this issue.In chapter4, this paper verifies the influence of foreign exchange on MM based on monthly statistics from January2002to June2013. The conclusion is that the impacts of the net foreign asset as of total asset and central bank as of total liability on MM are positive. This paper also analyses the direct and indirect impact of foreign exchange to Shibor. Empirical tests show that the direct effect is weak, but foreign exchange successiully influences Shibor from indirect channels, such as time deposit rate、required reserve ratio and central bank issue rate.In chapter5, conclusions of this paper hve been made. Foreign exchange has influenced the conduction of China’s monetary policy in two ways. On one side, M2is more difficult to be adjusted by monetary policy because foreign exchange has influenced money base and money multiplier. This weakens the controllability of quantity based targets. On the other side, foreign exchange has had an indirect impact on Shibor through influencing issue rates of central bank notes, making our monetary policy becoming more "price based".associated policy advices are given according to the previous analysis.