THE INFLUENCE OF INTERNATIONAL CAPITAL FLOW ON THE EFFECTIVENESS OF CHINESE MONETARY POLICY

The effectiveness of the monetary policy in open economies could be impaired during periods of large capital inflows. This paper innovatively examines the different impacts of international capital flows for both long-term and short-term on the effectiveness of monetary policy by using a TVP-VAR model from the time-varying perspective. In addition, we provide a modified offset coefficient model and measure the offset effects for both long-term and short-term international capital flows. The impact of short-term international capital flows on the effectiveness of monetary policy is positive and much more significant than that of long-term international capital flows. In the dynamic process, we find the offset coefficient of short-term international capital flows has a more violent fluctuation than that of the long-term international capital flows. Implications are explored from three aspects: establishing effective financial supervision, perfecting monetary policy transmission mechanism and developing new monetary sterilization tools.