The Research On The Renminbi Exchange Rate Regime Based On The Var Model

As the conversion ratio between different currencies, foreign exchange rate acts as the lever of adjusting the national economy equilibrium both at home and abroad, and it is also one of the most important financial instruments in the field of international finance and trade. The reasonability of exchange rate system determines whether the country's resources are reasonably used or not. It also has a significant impact on the balance of international payments and sustainable development of the national economy. The sub-prime crisis, which began in the United States in 2007, has evolved into a global financial crisis. The world economy suffers a lot, Chinese economy is also facing a severe challenge, and thus the problem of exchange rate system is again highlightened. With the increasing degree of capital openness, the exchange rate regime fixed to U.S. dollar could no longer meet the requirement of Chinese economic development. From July 21, 2005, the adjustable and manageable floating exchange rate system with reference to a basket of currencies, which is based on market supply and demand, had been carried out in China. RMB will no longer fix to the single dollar and the exchange rate mechanism becomes more flexible. This thesis hopes to analyze the effectiveness of the exchange rate system reform on the basis of theoretical and empirical study, thus provide a reference for future developing direction of exchange rate regime.Based on the"Trilemma theory", an appropriate structural VAR model is used in the thesis by choosing corresponding variables. The relationship between inflation, independence of monetary policy and capital controls is discussed in the thesis, with the RMB exchange rate system fixed to the U.S. dollar implemented from January 1997 to June 2005 and the system with reference to a basket of currencies carried out from July 2005 to December 2008 being respectively applied to be the established conditions. By constructing a VAR model and using cointegration analysis, variance decomposing, impulse response function, Granger causality test and other methods, a comparative analysis of reasonability of RMB exchange rate regime during these two periods is carried out. A negative correlation between independence of Chinese monetary policy, the degree of openness and the level of inflation is exhibited through empirical analysis, regardless of whether the RMB exchange rate is fixed to U.S. dollar or it is with reference to a basket of currencies. It also shows in the long term there is a positive correlation between independence of monetary policy and capital controls, which is in line with the"Trilemma theory". However, the manageable floating exchange rate system with reference to a basket of currencies is more flexible and eases the level of conflict between monetary policy and exchange rate policy to a certain extent. But due to China's economic system and the international situation or other reasons, the exchange rate under the regime has not been fully market-oriented yet, there are still some problems.