This paper theoretically considers the long-run sustainability of China's monetary-cum-exchange rate policy under the impossible trinity.Two different models are examined:One sterilizes current net foreign assets(...This paper theoretically considers the long-run sustainability of China's monetary-cum-exchange rate policy under the impossible trinity.Two different models are examined:One sterilizes current net foreign assets(NFAs)and the other focuses on NFAs realized in the previous period.Under the de facto opening of financial flows,sterilization yields a negative risk premium in uncovered interest parity(UIP)that triggers a feedback increase among capital inflows.Here,stability depends on the magnitudes and the combination of structural and policy parameters.It is shown that if current capital inflows are sterilized,the monetary-cum-exchange rate policy in China offers a sustainable solution for exchange rates that are relatively stringently managed.However,such a solution can be obtained for relatively flexible or moderately managed rates if sterilization policy is implemented on the previous period's inflows.展开更多
文摘This paper theoretically considers the long-run sustainability of China's monetary-cum-exchange rate policy under the impossible trinity.Two different models are examined:One sterilizes current net foreign assets(NFAs)and the other focuses on NFAs realized in the previous period.Under the de facto opening of financial flows,sterilization yields a negative risk premium in uncovered interest parity(UIP)that triggers a feedback increase among capital inflows.Here,stability depends on the magnitudes and the combination of structural and policy parameters.It is shown that if current capital inflows are sterilized,the monetary-cum-exchange rate policy in China offers a sustainable solution for exchange rates that are relatively stringently managed.However,such a solution can be obtained for relatively flexible or moderately managed rates if sterilization policy is implemented on the previous period's inflows.
