A Study On The Effect Of The Dual Structure And The Discretionary Policy On The Rmb Exchange Rate

With the rapid and stable development of the Chinese economy, the issue of theRMB exchange rate is becoming one of the hot spots of international economics.Especially since2000, under the context of China’s rapid economic development andthe "double surplus", there is a heated debate of the RMB exchange rate. There is thedistinctive feature of the Chinese economy that is the dual structure and central bankintervention. However there are a few studies which involve the impact of the dualstructure, the central bank intervention and central bank policy choices on the RMBexchange rate. With the improvement of the dual structure, the structure of economicvariables has also undergone a change.Based on this, this paper works on the effect of the dual structure and the centralbank’s discretion of the optimal goal on the RMB Exchange Rate. Its basic logicstructure is as follows:(1) because of the dual structure, the trend of the RMB exchangerate is not in line with traditional theoretical predictions, that is "The puzzle of theRMB exchange rate ". There is the impact of the dual structure on the RMB exchangerate.(2) In order to gain the maximum benefit, it is necessary for the central bank tosolve the market failure by the discretion, which is there is discretion of the centralbank’s optimal target.(3) The discretion of the central bank’s optimal target is dividedinto the optimal decision of the internal market and the optimal decision of the externalmarket. The optimal decision of the internal market is the central bank’s optimal choicebetween the economic growth and the inflation,The optimal choice of the external market refers to the central bank intervention inthe foreign exchange market which the central bank makes a decision between thefluctuation of the exchange rate and the foreign exchange reserves.(4)With theimprovement of the dual structure, the economic variables will change. So the impact ofthe economic variables will change.The main research results are as follows:①this paper employs the non-linear model to investigate the impact of the dualstructure about the RMB exchange rate.Until now, there is a few study of the B-S effect which involves the dual structure.In the process of a country’s economy to catch up, there is a Great uncertainty of theB-S effect because of the changes in labor supply. The wage rates do not increase with the improvement of the labor productivity because of the existence of the dual structurein the developing economies. There is no appreciation pressure of the real exchange rateif the growth of wage rate is not synchronized with it of the labor productivity. Theprice index of a country will sharply rise when the growth of the wage rate issynchronized with it of the labor productivity. There is an uncertainty about the overallprice level when the growth rate of the wage rate is less than it of the labor productivity.However the overall price level will decline if the money wages remain unchanged.Therefore, the real exchange rate is constant and even the devaluation may occur.In order to reflect the BS effect change mechanism with the changes in theeconomic variables，effectively capture changes in the structure of the economicvariables of the BS effect and explain "The puzzle of the RMB exchange rate ", thispaper employs the non-dynamic panel threshold model of Hansen to analyze theconduction efficiency of the labor productivity on the wage rate in the dual structure andstudy the threshold effect of B-S.With the dual structure change, this article reveals the internal mechanism of theB-S effect change and the BS effect exist inherent reason from the perspective of thedual structure which explains “The puzzle of the RMB exchange rate” by Lu Feng. Thisarticle also reveals the intrinsic relationship between the appreciation of the RMBexchange rate and the recent "Labor shortage" and investigates the impact of the dualstructure on the RMB exchange rate.②By expanding the model of Ronald Shone, we explores the optimal objectivefunction of the central bank to studies how the discretion of the central bank’s optimaltarget effecting the RMB exchange rate.There is the market failure because of the dual structure. To this end, it is necessaryto solve market failure by taking a discretionary policy. It is inevitable that thediscretionary policy operations affect the exchange rate.By expanding the model of Ronald Shone, we explore the optimal objectivefunction of the central bank. We derive the equation of the RMB equilibrium exchangerate by employing a dynamic programming and Bellman equations. We investigate theimpact of the discretionary policy operations under the central bank optimal target andestimate the zone of the RMB equilibrium exchange rate.There is the market failure because of the dual structure. To this end, it is necessaryto solve market failure by taking a discretionary policy. It is inevitable that thediscretionary policy operations affect the exchange rate by the central bank.By expanding the model of Ronald Shone, this paper explores the optimal objectivefunction of the central bank. We derive the equation of the RMB equilibrium exchangerate by employing a dynamic programming and Bellman equations. We investigate theimpact of the discretionary policy operations under the central bank optimal target andestimate the zone of the RMB equilibrium exchange③we use of the asymmetric loss function to study the central bank’s optimaldecision of the external market effecting the RMB exchange rate.There are a lot of policy costs and political costs because of the central bank oflinear intervention. Therefore, there is an asymmetric zone of intervention which thecentral bank discontinuously nonlinearly intervene the foreign exchange market.However the standard quadratic loss function can only characterize the linear target ofthe central bank which can not describe the nonlinear and zone preferences of thecentral bank in the foreign exchange market.This is the first use of the asymmetric loss function to study the mechanisms andmethods the central bank’s intervention and investigate the behavioral preferences ofcentral bank’s intervention in the foreign exchange market and the RMB exchange ratetarget zone. We analyze the relationship among the central bank interventionpreferences, fluctuations in exchange rates and foreign exchange reserves and theimpact of the central bank’s asymmetric intervention.