Capital controls and optimal Chinese monetary policy |
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Affiliation: | 1. City University of Hong Kong, Hong Kong;2. Osnabrück University, Germany;3. Osnabrück University and CESifo, Germany;1. Department of Economics, Johns Hopkins University, Baltimore, MD 21218, United States;2. NBER, Cambridge, MA 02138, United States;3. Research Department, International Monetary Fund, Washington, DC 20431, United States |
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Abstract: | China׳s external policies, including capital controls, managed exchange rates, and sterilized interventions, constrain its monetary policy options for maintaining macroeconomic stability following external shocks. We study optimal monetary policy in a dynamic stochastic general equilibrium (DSGE) model that incorporates these “Chinese characteristics”. The model highlights a monetary policy tradeoff between domestic price stability and costly sterilization. The same DSGE framework allows us to evaluate the welfare implications of alternative liberalization policies. Capital account and exchange rate liberalization would have allowed the Chinese central bank to better stabilize the external shocks experienced during the global financial crisis. |
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Keywords: | China Sterilization Capital controls Renminbi exchange rates Optimal policy |
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