Before And After Adjustment Of The Rmb Exchange Rate Between The Three Major Currencies, Time-varying Correlation

The adjustment of the Chinese RMB exchange rate system on July 21, 2005, will undoubtedly have affected the dependence of between the foreign currency exchange rates. By analyzing the impact of the before and after reform on the dependence of between the foreign currency exchange rates, not only can reveal the quality of the exchange rate system reform, but also can reflect the degree of linkage between the foreign currency exchange rate, which plays an important role to set the currencies weight of a basket of currencies and the exchange rate risk management of foreign currency Portfolio.This paper deeply analyzed the advantage and disadvantage of both fixed exchange rate system before the reform of the RMB exchange rate system and the managed floating exchange rate system after reform of the RMB exchange rate system, which is based on supply and demand of the market, with reference to a basket of currencies. The analysis showed that the two different have their role and limitations in specific historical stage. The results showed that the fixed exchange rate system can reduce the exchange rate risk to ensure the security of the financial market and the macro-economic, while the exchange rate system after reform can maintain internal and external balance, reduce the exchange rate risk and keep the stability of the international competitiveness and the export-import costs.In the next, this paper studied the dependence between the U.S. Dollar, Euro and Japanese yen against the RMB before and after the adjustment of the RMB exchange rate regime by using the latest econometric technology - time-varying copula technology. The results show that the fixed exchange rate system before the RMB exchange rate system reform makes the dependence of U.S. Dollar and the Euro against the RMB, U.S. Dollar and the Japanese yen against the RMB serious distortions, while the dependence of Euro and Japanese yen against the RMB is basically reasonable reflection of the true situation of the market. After the reform of RMB exchange rate system, the dependence between U.S. Dollar exchange rate, Euro exchange rate and Japanese yen basically reflected the relation of their representative of the competitive economies. And the impact between the RMB exchange rate system reform on the dependence of the Dollar and Euro exchange rate, Dollar and Japanese yen exchange rate is greater than the dependence between the Euro and Japanese exchange rate. The results also indicated that the dependence between the Dollar and Euro exchange rate is more stabilitable than the dependence between the Dollar and Euro exchange rate.The results reveal the effect of RMB exchange rate reform on the dependence between Dollar, Euro and Japanese yen exchange rate, which corrected the serious distortion of the dependence. It indicated that after the reform, the current RMB exchange rate system can better reflect the relationship of competing among Dollar, Euro and Japanese yen.