The Impact Of RMB Exchange Rate Volatility On China's Economic Development

The effects of exchange-rate volatility on Chinese economics have been previously examined in the literature since the advent of flexible exchange-rate. In the light of the importance of export, import and foreign direct investment (FDI) for the promotion of economic development, this paper examines the impact of the change in the real effective exchange rate and its volatility on China's export, import and FDI. This paper employs the conditional variance of the real effective exchange rate index from generalized autoregressive conditional heteroscedasticity (GARC H) models to proxy the exchange rate variability. The study of RMB real effective exchange-rate index is a distinctive feature of this paper. This paper represents attempt to use changes in real effective exchange rate index in studying Chinese export, import and foreign direct investment (FDI).RMB rate reform has happened since Chinese reform and opening up. It often leads to exchange rate volatility. This paper analyses RMB rate volatility with exchange rate reform. At the same time, the export, import, FDI and exchange rate series are given to the considerable shocks .We apply some tests to examine the stationarity of the time series.This paper mainly gives an empirical investigation to the effects of exchange-rate volatility on China's export, import and FDI. RMB exchange rate variability is measured by the conditional variance of real effective exchange rate index from GARCH model. We examine the stationarity of individual series and testfor unit root and cointegration. The evidence from the estimation of the models is found that exchange rate volatility has a significant positive long-run effect on import, but a significant negative long-run impact on export and FDI, and exchange rate volatility has little short-run impact on trade flows and FDI. Finally, some suggestions to the RMB exchange rate policy are given on the basis of the above analysis.This paper involves five parts:Chapter 1 gives a brief account of theory related to the impact of exchange rate volatility on economics.Chapter 2 gives a brief analysis of the character of the change of exchange rate of RMB. At the same time, This paper gives an introduction on the methods of calculation of the RMB real effective exchange rate index and its volatility. Considering this paper pays more attention to the analysis of the effects of the effective exchange rate volatility on Chinese export, import and FDI, the theory on the real effective exchange rate index and its method of calculation are first of all introduced.Chapter 3 is mainly empirical research. The chapter presents an empirical investigation on the effect of the RMB real effective exchange rate volatility on China's export and import, which is the core of the thesis. It analyzes the stability of the export, import and exchange rate series by the means of unit root test. The empirical analysis on the impact of the RMB exchange rate volatility on China's export and import is conducted on the basis of the cointegration theory and error correction model.Chapter 4 presents an empirical investigation on the effect of the RMB real effective exchange rate volatility on China's FDI, which is also the core of the thesis. It analyzes the stability of FDI and exchange rate series by the means of unit root test. The empirical analysis on the impact of the RMB exchange rate volatility on China's FDI is conducted on the basis of the cointegration theory and error correction model.Chapter 5 gives some now and future suggestions to the RMB exchange rate policy according to the above analysis.