Macroeconomic effects of central bank foreign exchange intervention in China under short-term international capital shocks

• A new three-equation open economy system is constructed. • The risk premium caused by cross-border capital is in different regional systems. • The effect of foreign exchange intervention to hedge is different. • The PBOC is difficult to offset the net outflow of short-term international capital. We investigate the effect of China’s central bank foreign exchange intervention under short-term international capital shocks by constructing a three-equation open economic system, including short-term international capital flows, central bank foreign exchange intervention, and risk premium factors. Our research shows different zoning systems for the risk premium under cross-border capital flows, and the impact of central bank foreign exchange intervention in hedging short-term international capital flows differs across these zoning systems. Meanwhile, it is more difficult for the central bank to offset short-term net outflows of international capital compared with net inflows, indicating asymmetric effects of short-term international capital shocks.