Empirical Test On RMB Exchange Rate Policy Effects

RMB exchange rate policy effects directly related to the improvement of China’smacroeconomic control system. Improveing macro-control effects and the reform of RMBexchange rate regime are hot issues of the Chinese economy, with significantly improveingGDP and enhancing macroeconomic external dependence, macroeconomic targets graduallyestablished in order to maintain economic grow stably and stability of RMB, which is both anadjustment of the basic economic security and a core strategy during the current and futuredevelopment of our country. Exchange rate as a link inside and outside a country’s economy, animportant hub for the RMB exchange rate policy as an important instrument of monetarypolicy, them should work together to achieve the ultimate goal of monetary policy. Differentfrom policies and market-oriented floating exchange rate system in developed countries, RMBexchange rate policy has long been under the control of the central bank, according to thetheory, both of the two polices will inevitably affect each other in the process of achievingpolicy objectives, this paper focus on the analysis when monetary policy and exchange ratepolicy impacting on the domestic economy, the effects of RMB exchange rate policy and thespecific performance of monetary policy on the exchange rate mechanism of the economiceffects, as well as the conflict and coordination effect of exchange rate policy effects ofmonetary policy.Monetary policy and exchange rate policy mix to achieve the expected effect of themacro-control goals, but this match for a long time within the limits of the exchange rateregime often inefficient in general, and policy effects arising from the macroeconomicenvironment itself might effect the impact between them, therefore, this article hopes in themode of texting the RMB exchange rate policy effects to explore the situation RMB exchangerate policies affect the monetary policy, in order to find the effectiveness of RMB exchangerate policy and independence of monetary policy objective, and give some constructivecomments and suggestions in the future."Meade conflict" knock the door of researching on the exchange rate and monetarypolicies relationships, the classic M-F model analyzes the effects of monetary policy under thedifferent exchange rate policys and capital flow restrictions, on this basis, this paper extend toresearch the effect of monetary policy under the RMB exchange rate policy. Four-quadrantperspective insight into the process of dynamic adjustment variable price and asset prices ofDornbusch model, and the linkage magnitude and characteristics between exchange rate adjustments and interest rates change. Redux model describes the basic framework for theanalysis of policy of NOEM. This part introduce the exchange rate and monetary policies fromthe root to the development of mutual problems detailly, and extended analysis for the RMBexchange rate policy.Firstly, an empirical test of RMB exchange rate policy pass through of inflation based onthe changes of inflation environment is resrsched, frist through ARDL model test the “Tayloreffect”, it shows that either long-term or short-term CPI pass-through effect of the exchangerate is lower and the effect of exchange rate pass under low inflation environment issignificantly lower than the pass-through effect of the total sample period. Effects of exchangerate transmission channel give a reasonable explanation on the impact on inflation ratepass-through effect, under the direct channel and monetary channel are hampered by lowinflation environment; under high inflation environment, the pass-through effect of directchannels goes smoothly, but monetary channels reverse the role of inefficient transmissioneffect has played a decisive role.Secondly, based on the pricing currency options, empirical test on the RMB exchange ratepolicy expenditure switching effect, starting from the profit maximization model from exportmanufacturers to get the empirical measurement model, then analyzing the selected currencypricing factors endogenous based NOEM model. By Wald coefficient test and analysis oftime-varying parameters based on State Space model found that RMB exchange rate policyexpenditure switching effect some extent constrained by RMB monetary policy, but the impactis limited. Therefore, policies should improve the RMB exchange rate expenditure switchingeffect by cooperateing the pricing currency of imported goods and RMB monetary policystrategic, and to improve the RMB exchange rate policy expenditure switching withoutexcessive fluctuations in the RMB supply situation effects.Again, empirical test study on the RMB exchange rate-interest rate linkage effect, andbuild the China’s Financial Condition Index. RMB exchange rate-interest rate linkage effecttest wants to text the feasibility interest rate parity model and viscous monetary modelapplicability in China, using a VAR model impulse response to analysis the direction and theextent of RMB exchange rate influence the of interest rates, and detailed analysis on the shocksinfluence other prices responses. Finally, this paper analyzes the feasibility of the China’s FCI,and the impact of the financial market as an important policy tool of the central bank torespond. The empirical results show that, the RMB exchange rate on the interest rate effect ofmonetary channel is relatively smooth, the exchange rate can have an impact on the domesticeconomy by affecting the level of interest rate, thus affecting the mix of monetary policyinterest rate instruments and the RMB exchange rate policy on the overall economic prices ismore significant. China’s FCI joining with the real exchange rate, real interest rates, stockprices and real estate prices, having the ability to interpretate CPI, so it can serve as animportant policy tool of the central bank to deal with the impact of the exchange rate market and financial market shocks.Finally, is the empirical test of the effect of exchange rate policy and monetary policyconflict based on the asymmetry of MS-VAR model, analyzing the reason of RMB exchangerate and monetary policies conflict. First, founding the main reason of RMB exchange ratepolicy and monetary policy conflicts is xcess of the market liquidity, exchange rate policycontrols liquidity through rising foreign exchange reserves, monetary policy through openmarket operations to offset the impact of exchange rate policy on liquidity as possible tomaintain their independence. Based on the briefly selected MSIH (3)-VAR (2) model to test theactual situation of China, model estimated and respectively impulse response analysises findthe conflict effect and the coordination effect of exchange rate policy and monetary policy.Empirical results show that, under the high inflation regime, increasing foreign exchangereserves will lead to a rapid ascension of market liquidity, under the smooth regime, althoughthe increase in foreign exchange reserves has led to an increase in market liquidity but notparticularly remarkable, may because of the smooth transmission mechanism, the price levelrise faster than expected; under high inflation regime, rising foreign exchange reserves wouldlimit the growth of China’s macro-economy, and under this regime, increaseing foreignexchange reserves cause the bubble in financial markets. Appreciation of the RMB exchangerate will reduce foreign exchange reserves, the central bank’s exchange rate policy formulationmust be weighed between them.In this paper, besides the important articles mainline researching on the several importanteffects of RMB exchange rate policy, specially researchs the impacts of monetary policy on theRMB exchange rate policy effects, as well as the impacts of the current exchange rate policyon monetary policy effects. Through the empirical analysises we can understand effectivenessof various macro-economic effects the RMB exchange rate policy, as well as the mechanism ofexchange rate and monetary policies affect each other. Last, this paper brings somerecommendations and opinions for the development of China’s central bank monetary policygoals and the ultimate goal of the operation, as well as the adjustment of the RMB exchangerate policy direction.