Exchange-rate Policy And Financial Stability Linked Channel

In the last 30 years, financial crisis happened in many counties. Financial stability become a very important task for the central bank of every country, especially after the subprime crisis.The definition of financial stability is not unified by academia. Financial stability is an antique and modern task which has experienced a long history. It has received wide attention after many severe financial crises since the 1990s. For China, RMB/USD exchange rate which is the connection between domestic market and global market is a key factor. In the history, financial crisis always come with huge fluctuation of exchange rate. Subprime crisis has caused the unrest of global financial market. This article used Smoothing Transition Policy Variables GARCH Model according to the data of RMB/USD exchange rate, and got the fitted value of the volatility of RMB/USD exchange rate.With China's gradual relaxation of exchange controls and the liberalization of the exchange rate band, the adjustment of exchange rate policy has had a greater impact on the risk of RMB/USD exchange rate than ever before. The non-expected exchange rate fluctuations under the conditions of extreme exchange rate policy will be the an important aspect of exchange rate risk. Small probability and unexpected events are often overlooked by statistical models, but they often break the general economic law ,and will have a tremendous impact on China's financial stability. RMB/USD exchange rate will affect China's financial stability through export, real estate market and bank system. By using Smoothing Transition Policy Variables GARCH Model and Stress Test, we can conclude that releasing the range of RMB/USD exchange rate will impact the financial stability of China a lot, and we still have to make it under careful supervision.