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

This paper 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. Monetary shocks to various types of monetary policy instruments such as required reserve ratio, repo rate, and the benchmark lending rate have significant effects on exchange rate. However, shocks to foreign exchange intervention have limited effects on exchange rate