Central Bank Financial Strength and the Cost of Sterilization in China

Christer Ljungwall, Yi Xiong, Zou Yutong

    Research output: Contribution to journalJournal articleResearchpeer-review


    Using a unique monthly data set over the period 2000:1-2008:12, this paper presents empirical findings on China's central bank, the People's Bank of China, from the viewpoint of its financial strength and the cost of monetary policy instruments. The results show that PBoC is constrained by the costs of its monetary policy instruments. PBoC tend to use less costly but market-distorting instruments such as the deposit interest rate cap and reserve-ratio requirements, rather than more market-oriented but more costly instruments such as central bank note issuance. These costs remain under control today, but may rise in the future as PBoC accumulates more foreign assets. This, in turn, will jeopardize the Chinese monetary authority's capability to maintain price stability.
    Original languageEnglish
    JournalChina Economic Review
    Issue number1
    Pages (from-to)105-116
    Publication statusPublished - Jun 2013

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