LECTURE 9: The Monetary Approach to the Balance of Payments • Sterilization definitions • Price-specie flow mechanism • Income-money flow mechanism • Brief history of the Gold Standard • Appendix: China sterilizes inflows, 2004-10 ITF-220 - Prof.J.Frankel
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LECTURE 9: The Monetary Approach to the Balance of Payments Sterilization definitions Price-specie flow mechanism Income-money flow mechanism Brief history.
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LECTURE 9: The Monetary Approach to the Balance of Payments
Sterilization of foreign reserves: People’s Bank of China sold sterilization bills,
thereby taking RMB out of circulation.
Data: CEIC Source: Zhang, 2011, Fig.4, p.45.
ITF-220 - Prof.J.Frankel
ITF-220 - Prof.J.Frankel
=> The MB growth rate was kept down to the growth rate of thereal economy (≈ 10%/year), so there was little inflationary pressure.
In 2003-04, forex inflows accelerated rapidly.
Initially, the PBoC had no trouble sterilizing the inflows.
ITF-220 - Prof.J.Frankel
In 2007-08 China had more trouble sterilizing the reserve inflow
• PBoC began to have to payhigher domestic interest rates – and to receive lower interest rate on US T bills – => “quasi-fiscal deficit” or “negative carry.”
• Inflation became a serious problem in 2007-08.
• Also a “bubble” in the Shanghai stock market.
ITF-220 - Prof.J.Frankel
Sterilization faltered in 2007 & 2008Growth of China’s monetary base & its components:
Source: HKMA, Half-Yearly Monetary & Financial Stability Report, June 2008
Money growth accelerated sharply,
2007-08
ITF-220 - Prof.J.Frankel
China’s CPI accelerated in 2007-08
Source: HKMA, Half-Yearly Monetary and Financial Stability Report, June 2008
Inflation 1999 to 2008
Sterilization of foreign reserves:Decreases in PBoC’s domestic assets