The Impacts of Foreign Exchange Reserves Intervention under the Case of Capital Control in China

Abstract

This paper studies the impacts of foreign exchange reserves intervention under the economic structures of China that feature capital controls, managed floating exchange rate and partially sterilized intervention. The central bank transacts government bonds to sterilely intervene the foreign exchange market in order to maintain a managed float regime. The results show that under the managed float regime, compared with capital account liberalization, a higher degree of capital controls may increase output and consumption and stabilize exchange rate and foreign exchange reserves in the short term. But under the case of the fixed exchange regime and capital controls, the impacts of full sterilization intervention and non-sterilization intervention are almost the same. Relative to the full floating exchange rate regime, the implementation of a managed floating exchange rate for the China’s central bank may stabilize the fluctuation of the nominal exchange rate, but it may expand the economic fluctuations, fluctuations in the scale of foreign assets held by the central bank and the scale of government bonds held the private.