Research On The RMB: USD Exchange Rate Based On The Choas Theory

The China exchange rate system was reformed substantially in July 2005, with the set up of long-term development target of market-oriented RMB exchange rate formation mechanism. Thereafter, a series matching implementation rules have been promulgated by the governmental and RMB has kept appreciating, with increasing fluctuation frequency and extent, until October 2008. RMB stopped appreciating due to the influence of global financial crisis, which not only examines the stability of RMB foreign exchange market but also puts strict requirements for transformation of government function, development of exchange rate system, intervention manners of the central bank, etc.The paper discusses whether changes in RMB exchange rate show difference prior to and after the reform of RMB exchange rate. If it does, what are new features and rules of changes in RMB exchange rate? What targets are when the central bank intervenes in the foreign exchange market so as to effectively reduce over-fluctuation and minimize the exchange rate misalignment?In the part of theory research, the paper reviews the traditional theory of exchange rate, which is weak in interpreting and forecasting the abnormal fluctuation in real world for the following reasons:firstly, the assumptions of traditional theory, effective market hypothesis and rational expectation hypothesis, are too idea to be different with the actual economy; secondly, the linear paradigm applied by the traditional theory conflict with the non-linear character of changes of exchange rate. Besides, the research actuality, basic concept and key model of chaos theory are introduced, which are the research rational and methodology of this paper.In the part of empirical study, the paper qualitatively analyzes the actuality of RMB spot rate and oversea NDF rate. The result shows that both of them are characterized of obvious "cute peak and fat tail" and "volatility clustering effect" which deny the conclusion of effective market hypothesis. Then, empirical test is executed by selecting the time series of RMB:USD exchange rate and applying Simon Haykin's chaos criterion as standards. The test result implies that changes in exchange rate are characterized of chaos dynamics after reform.On the basis of empirical study, the paper attempts to theoretically explain the intrinsic mechanism of chaos exchange rate and prove with models. Chaos exchange rate results from movements of exchange rate along with the signal of exchange rate price through intrinsic non-linear relationship when the information flow of foreign exchange rate is exposed to the effect of the trader heterogeneity. By applying this conclusion and combining the actual condition of exchange rate reform, the paper analyzes the chaos of RMB exchange rate.Through the aforesaid analysis and in combination of rational and method of chaos control, the paper establishes an exchange rate chaos model where the intervene factors of central bank is introduced. "Leaning Against the Wind" intervention fails to restrain fluctuation of exchange rate and minimize exchange rate misalignment. If the central bank selects to "Targeting Long-run Fundamentals" intervention and ensures sufficiently intervening level, both of two targets would be realized. Finally, the paper proposes some policies in accordance with the analysis result of empirical text of chaos exchange rate, theatrical explanation and intervening model of central bank.