Multiple Monetary Policy Instruments, Foreign Exchange Intervention, and the Exchange Rate in China

This article analyzes the effects of monetary and foreign exchange policies on the exchange rate in China by using structural VAR models with sign restrictions. In the empirical model, a number of monetary and foreign exchange policy instruments are considered, and interactions among these instruments and with the exchange rate are allowed. The main results are as follows: contractionary shocks to various monetary policy instruments, such as the required reserve ratio, the repo rate, and the benchmark lending or deposit rate, lead to a significant appreciation of the RMB against the U.S. dollar. However, shocks to foreign exchange intervention have limited effects on the exchange rate.