The Research On The Relationship Between Currency Substitution And RMB Exchange Rate

Currency substitution means that when one country's households lose confidence in currency stability or domestic asset income rates are relatively low, large scale currency substitution takes place,which makes foreign currency replaces domestic currency completely or partly in value reservation, transaction medium, value standard and so on. Currency substitution is the inevitable problem in the open economy, which makes exchange rate fluctuate frequently, influences the independence of monetary policy, decreases government's inflation tax and seigniorage, slacks social public's confidence in domestic currency and so on.Exchange rate,as currency price,has close relationship with our lives. With the globalization of world economy and finance ,the increasing perfection of socialist market-economy system and the speeding up of the progress of exchange rate's market-oriented reform, the impact of exchange rate on economy becomes more and more impressive,which has become an important economical index reflecting marcoeconomical situation of one nation. Many countries in the world uses exchange rate policy to regulate own economy frequently.The phenomenon of currency substitution and exchange rate changes are closely connected. On the one hand, different exchange rate systems and exchange rate changes influence currency substitution, such as fixed exchange rate system can lead to currency substitution on the supply side and floating exchange rate system can lead to currency substitution on the demand side; the expected rate change mainly refers to expected exchange rate devaluation. In general, when a country's currency devaluation occur, it is more likely lead to more serious currency substitution. On the other hand, currency substitution will impact on the exchange rate, such as currency substitution leads to the expansion of exchange rate volatility and instability, exchange rate of the ultra-harmonic and"amplification".However ,with the liberalization of RMB capital account and steadily advancing of reform in foreign exchange administration system,China cannot avoid from increasing currency substitution either. Therefore, a deeper understanding of China's currency substitution and analysis the relationship between currency substitution and the RMB exchange rate is very important for China to maintain macro-economic condition balanced and the national monetary system stable in the open economy.This paper analyses in detail the economic relation using cointegration and Granger causality test theory between RMB nominal exchange rate&its volatility and currency substitution ratio by using China's quarterly data during the first quarter of 1998 and the forth quarter of 2008 on the basis of existing domestic&foreign researches.The result indicates that steady equilibrium relation exists between RMB nominal exchange rate&its volatility and currency substitution ratio,but the effect is not remarkable and give some suggestions.