Abstract

This paper examines the inflation effect of the foreign exchange reserve increase and the effectiveness of monetary sterilization in China. The paper first reviews the theory and practice of the monetary sterilization policy of the People's Bank of China. Then a VAR model is employed to detect the dynamic effects of the foreign exchange reserve increase and the monetary sterilization on inflation. The results show that the monetary sterilization can affiliate the inflation effect raised by the foreign exchange reserve increase, and the effect last for about 8 months, while it has a positive effect on the gross output. Finally, some implications are drawn from the test result.

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