RMB Internationalization and the Effectiveness of Exchange Rate Intervention

This paper constructs a DSGE model of asymmetric two-country open economy, and compares and analyzes the economic effects of both sterilized and unsterilized interventions. Moreover, we explore the impact of RMB internationalization on the spillover effect of foreign monetary policy and the effectiveness of exchange rate intervention. We identify that both sterilized and unsterilized interventions can slow down exchange rate fluctuations. However, unsterilized intervention will weaken the stability of China's monetary policy on output and inflation, resulting in policy objectives conflict and higher real economic stability costs. The promotion of RMB internationalization will have a significant impact on the spillover effect of foreign monetary policy, thus reducing the necessity for unsterilized intervention to stabilize the exchange rate. Meanwhile, we should also moderately reduce the regulation of sterilized intervention. According to the conclusion of the study, the Chinese monetary authority should prioritize the reform of the RMB exchange rate regime. While promoting the internationalization of RMB, we should gradually reduce the frequency and intensity of exchange rate intervention, and speed up the reform of exchange rate marketization.