Study Of Economic Openness In The Process Of Exchange Rate Fluctuations

The opening and globalization of economy is inevitable to any country, no mater in the interval of thousand years or decade years. The process of opening not only promotes the development of economy and society, but also brings many kinds of impacts and negatives, such as the exchange rate volatility.Exchange rate is trade medium in international business. Changing of exchange rate is a useful mechanism to allocate economic resources. But a huge volatility of exchange rate in short time will trigger disaster, which many countries had encountered in history when open their economy to the world. Of course, an suitable exchange rate system and low exchange rate volatility is significant for trade and social stabilization, especially to those developing countries relied heavily on trade with incomplete and vulnerable market.The evolution of International Monetary System, from gold standard, Bretton Woods System to Jamacia System, described the efforts of humans to stabilize exchange rates. Unfortunately, exchange rate became more volatile and floating arrangement prevailed in the process of globalization.Now China is not proficient to manage exchange rate and handle the risk of volatility after thirty years of opening and reformation. The most urgent work now is to research and comprehend the mode of exchange rate volatility and its affecting factors. We need to know well the rule of exchange rate fluctuation and how to deal with it especially in developing countries. So this paper will explore this question.Economists had do some fundamental research work in this field, such as the opening degree of economy, volatility of exchange rate and relationship between themselves. Harald Hau (2002) examined macroeconomic data of 48 countries, including OECD, and concluded that tradable products play an important role in the volatility of exchange rate. The change of tradable product price can substitute the change of exchange rate, so low-opening countries get a more volatile exchange rate. Sun huanmin and Li guozhu (2004) researched data of 15 countries in 1993~2002 with panel model. They found that volatility of exchange rate has a negative relationship with opening degree and opening thus can restrain the volatility of exchange rate.However these researches have a lot of faults. For example, there lacks considerations about reasons and time features of exchange rate fluctuation, integrated frame work of theory and practice. On the basis of that exploration, we research this problem in such a way: analyze the reasons of volatility of exchange rate and set the theory model in the new opening macroeconomics frame work. Then examine the theory conclusion in several angles of view. If our viewpoint is validated, policy suggestions will be put forward according to international experiences and situation of our country.We will research this topic in three sectors. First sector (Chapterâ… ) analyze the characters of economic impacts which bring exchange rate volatility. Economic opening will bring two kinds of impacts: long-term impacts which change slowly introducing tendency fluctuation of exchange rate such as trade and FDI, short-term impacts which change abruptly conducting volatility of exchange rate such as speculate capital-flow and forecast. In general, the features of impacts and shock-absorption characters of economy together determine the volatility of exchange rate.Second sector (Chapterâ…¡,â…¢) builds the theory model and examine the conclusion in new macroeconomics frame work. High degree of economic opening will decrease volatility of real effective exchange rate because price of tradable products can be well adjusted. Impacts with different time structures will have different effects on economy according to the time characters of PPP. Generally, the stabile mechanism will be more effective in long run. Decouple between impacts and stabile mechanism brings complicated results and means different suggestions to different countries. Then we examine the conclusion in two ways: quantity test of the OECD and emerging market countries including China, qualitative analyze of financial crisis and evolution of International Monetary System. We believe that economic opening will restrain volatility of real effective exchange rate, though in some special times bring acute disorder.Third sector (Chapterâ…£,â…¤) focused on the implication of economics and policy: market can stabilize exchange rate under some conditions. Developing countries have a low level of opening degree and weak stabile mechanism, so fixed exchange rate arrangement and control of capital flow is necessary. In fully opening countries market arbitrage can restrain the change of exchange rate in long run, so we don't need to worry about it.The rapid opening of China provides a good evidence for this paper and itself is the goal of research. In view of international experiences and China conditions, we consider the short and long term effect and provide suggests of capital-flow control and exchange rate arrangement. This is not only significant to theory of exchange rate, but also to policies of stabilizing financial system.There is some trial of innovation in this paper: first, economic impacts are introduced into research of exchange rate volatility which made the frame work comprehensive. Volatility of exchange rate depends on outside impacts and stabile characters of economy. Impacts with different time characters conducted complicated volatility of exchange rate. Yet different countries facing same impacts have different reaction.Second, we put forward the stabile mechanism of opening and analyze its limitation. This mechanism only effective in long run means exchange rate system should transfer to floating when economy is opening. Market should play a more important role when determine exchange rate. So, floating arrangement of exchange rate is suitable to developed countries which have a high degree of opening and fixed arrangement is suitable to developing countries which have a low degree of opening. This is important and helpful for us to put forward policy suggestionsThird, sample in this paper emphasizes the research of developing countries which is very important to China. We solved a lot of difficulties when examine evidences of developing countries. Valuable results found there is significant for our conclusion and suggestions.