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China's monetary sterilization and it's economical relationship with the European Union

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  • Gábor, Tamás

Abstract

The author examines China’s monetary policy in the light of the sterilization process of the excess liquidity caused by the permanent foreign exchange rate intervention. The tools of the neutralization of the monetary oversupply, its effectiveness and its costs are also investigated. With the help of Two-stage least squares (2SLS) regression method it is demonstrated that the sterilization process of the yuan has been almost a total success on the level of the monetary base, and has been partially effective on the level of the M2 supply in the past 15 years. With a cost-benefit analysis it is highlighted that the practice of the monetary sterilization – which is thought to be loss-making in the literature – has been a profitable operation of the central bank up to date. After the demonstration of the monetary sterilization, the economic relationship between China and the European Union is investigated. It is pointed out that China’s role as a global importer and a global investor has been significantly appreciated. Thanks to China’s active economic presence in the European market during the crisis, the recession of the European economies were probably much moderate.

Suggested Citation

  • Gábor, Tamás, 2012. "China's monetary sterilization and it's economical relationship with the European Union," MPRA Paper 40362, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40362
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    References listed on IDEAS

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    More about this item

    Keywords

    China monetary sterilization; 2SLS; European Union; crisis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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