Research on the Two-Pillar Regulation and Control of Cross-Border Capital Flow Regulation under the Shock of Fed's Interest Rate Hike
The ultra-loose monetary policy of the US in the post-pandemic era has led to high inflation.The Federal Re-serve has started an epic interest rate hike cycle,causing the global financial risks to rise significantly.The fluctuation of the RMB exchange rate has intensified,calling for strengthened supervision.This article constructs a small open dynamic stochastic general equilibrium framework that includes non-interest foreign exchange reserves for counter-cyclical regulation of cross-border capital flows.It studies the effect of two-pillar regulation un-der the impact of the Federal Reserve's interest rate hike.The research shows that:firstly,under the impact of the Fed's interest rate hike,domestic output and inflation declined,and the RMB depreciated.At this time,the policy of reducing the foreign exchange reserve can stabilize the exchange rate and reduce economic fluctuations.The main mechanism is that reducing the foreign exchange reserve can increase the fund supply of foreign exchange loans of domestic financial institutions and reduce the financing cost of domestic enterprises.Secondly,al-though the policy of raising interest rates helps to stabilize the exchange rate,it will increase economic volatility and weaken the effectiveness of monetary policy.The two-pillar policy not only reduces output and exchange rate volatility,but also will not make monetary policy less effective.Thirdly,the optimal combination of two-pillar policies is one in which monetary policy tar-gets domestic output and inflation fluctuations,and macroprudential policy targets international capital flows.In order to improve the decision-making and operation of China's macroprudential policies,the article argues that China should adopt two-pillar regulation to cope with the aggressive interest rate hike of the US Federal Reserve.This includes lower-ing interest rates to address decline of inflation and output,and reducing the reserve requirement ratio for foreign exchange to promote the exchange rate stability.
The Federal Reserve Raises Interest RatesCross-Border Capital FlowTwo-PillarDynamic Stochastic General Equilibrium
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