This paper studies whether the cross-border capital flows may cause the expansion of China's money supply and domestic credit. At the same time, will the marketization of RMB exchange rate, capital account openness and financial liberalization affect the ability of Chinese monetary authorities to manage money supply and domestic credit?
This paper estimates the sterilization coefficients corresponding to China's money and credit markets, further uses the fixed-time-window recursive estimation method to obtain the time-series data of sterilization coefficients, and analyzes the impacts of exchange rate elasticity, capital control, sterilization cost, capital flow structure, and several financial market openness indicators, including the proportion of foreign banks, the development of bond market, and the concentration of banking industry, on the sterilization effectiveness of China's money and credit markets.
Our empirical results confirm that China has sterilized most of the impacts of cross-border capital flows on monetary base. The extent of sterilization was 76.4% on average. However, the effect of sterilization on money supply and domestic credit decreases significantly. The average sterilization coefficients are 46.9% and 61.1% respectively. Moreover, this paper also finds that the sterilization coefficients for corporate credit and household credit are 53.8% and 66.5% respectively, indicating that cross-border capital inflows have a greater impact on corporate credit than household credit. The recursive estimation results further show that the effectiveness of sterilization in the money and credit markets is dynamic. This may be because the effectiveness of sterilization is not only affected by the central bank's sterilization policy, but also changed due to the adjustment of exchange rate regimes and capital control policies, and even the different degree of financial market development.
This paper also finds that although the progress of financial development may reduce the effectiveness of sterilization, Chinese monetary authorities can still reduce the impact of cross-border capital flows on money and credit markets by increasing exchange rate flexibility, strengthening capital control, implementing macroprudential policies, reducing sterilization costs, improving banking competition, developing public bond markets, and adjusting capital flow components.
Key words
Cross-Border Capital Flows /
Financial Market Development /
RMB Exchange Rate Marketization
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