The Research Of Interaction Between RMB Exchange Market Pressure And Monetary Policy In China

It has been a full10years since RMB exchange rate issue was raised.However,the internal and external imbalances in the Chinese economy is still unresolved. Tokeep China’s economy more stable and healthy, it is urgent to discuss how to transferthe pressure of the RMB exchange rate into upward momentum of the economy.Monetary policy is a important way to adjust the economic development,so thestudy on the interaction of the RMB exchange rate and monetary policy in China isa the focus of research.The way the monetary policy affect the the real economysector to achieve the purpose of macroeconomic regulation and control of the CentralBank by the mediating variables conduction is through the intermediary conductionvariable by the manipulation of the monetary tool. In China the main monetary policytools are open market operations, the deposit reserve policy, central bank lending(rediscount), interest rate policy and exchange rate policy. This paper will provideproposal to ease the pressure of RMB appreciation derived from the interactionbetween the foreign exchange market pressure and monetary policy tools.Exchange Market Pressure is relatively new and attractive economic researchtopic in recent years. Focus of the study is to discuss the relationship between theforeign exchange market pressure level of domestic credit, interest rates, economicoutput, foreign interest rates, exchange rates and other economic indicators of themagnitude of the imbalance. Current research is Roper and Girton (1977) to establisha measure of exchange market pressure on monetary model, the Canadian foreignexchange pressure index, Kim (1985) studied the Korean currency pressure index,Tanner (1999) believes that response measures six Asian and Latin Americancountries, the monetary authorities to exchange rate depreciation pressures haveemerged, domestic credit crunch is not taken, but the expansion of domestic credit.Erbil and Kamaly (2000) argues that when the devaluation pressure on the foreignexchange market to improve, the Middle East and North Africa national monetaryauthorities reacted while increasing domestic credit and raise interest rates. Gochoco-Bautista and Bautista (2005) believes that the Philippine monetaryauthorities in times of crisis devaluation pressure on the reaction and non-crisisperiods and different, in a non-crisis period, the monetary authorities to ease thedownward pressure is often used to hedge and to provide liquidity to banks and othermeans; but in times of crisis, the monetary authorities do not take hedging instrumentsin favor of tightening domestic credit. They are basically the same conclusions withthe traditional model.Firstly this paper focuses on the foreign exchange market pressure index. Thecalculation of EMP index concludes model-relying EMP index and non-model-relying EMP index.And non-model-relying EMP index is more applicableaccording to the result of study.Then this paper studies the transmission mechanism of the RMB exchange ratefluctuations affect the related monetary policy through the capital market access andinternational trade access. This paper analyzes the capital market access from threeperspective:the capital market, securities market mechanism and indirect financingmechanism. The analysis of International trade access rely on Mundell-FlemingModel framework.Lastly this paper uses non-model-relying method to calculate EMP index,then usChina’s monetary policy variables endogenous variable to generate a VAR model withEMP index. The empirical research analyzes the interaction between the pressure ofRMB appreciation in this century China’s monetary policy and other endogenouseconomic variables. The research results show that the pressure of RMB appreciationhas a certain degree interaction with the monetary policy variables.From the above theoretical and empirical research, this paper comes to thecountermeasures to ease the pressure of RMB appreciation: First, our country shouldimprove the formation mechanism of RMB exchange rate; second, remove therestriction on the exchange flow through the capital account; Third, change theexport-oriented way of economic development; fourth, change retention of foreignexchange; fifth, encourage and expand the foreign investment of our firms.