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

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  • Hao Jin

    (Indiana University)

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.

Suggested Citation

  • Hao Jin, 2015. "Foreign Exchange Interventions, Capital Controls and Monetary Policy: The Case of China," CAEPR Working Papers 2015-019, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2015019
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    References listed on IDEAS

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    Cited by:

    1. Yang Zhou & Shigeto Kitano, 2023. "Capital Controls or Macroprudential Policies: Which is Better for Land Booms and Busts?," Discussion Paper Series DP2023-12, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2024.

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    More about this item

    Keywords

    Foreign Exchange Interventions; Capital Controls; Monetary Policy; Chinese Economy; Welfare;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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