The Relative Supply Of Money And Exchange Rates Volatilities

Since the financial crisis of2008, China and the United States have adopted loose monetary policy in different degree to deal with the global financial crisis. These policies increased the money supply in certain extent in the two countries, China’s money increased even faster than the United States, in this context, RMB has continued appreciate against dollar, even break record. The phenomenon of the money supply increased in a large margin and RMB exchange rate continued appreciate coexistence is totally different the traditional exchange rate determination theory. This paper based on the perspective of monetary capital investment, Combined with expected investment yield、relative money supply and real output to analyze their impact on exchange rate fluctuations, aimed at to explain this phenomenon with a new theory perspective and provide a more comprehensive policy suggestions to policy makers.This paper focuses on the Western theory of exchange rate determination, the majority of exchange rate determination theories are established in purchasing power parity theory and the theory of interest rate parity, such as elastic and sticky price monetary model and so on. In this paper, we draw in these two theories, and then from the monetary capital investment perspective, analyze the logical relationship between relative money supply、expected investment yields and exchange rate fluctuations, then build a theoretical model.Secondly, the investor’s expected investment return expressed by formula according to interest rate parity theory, with the interest rate, exchange rate and the spot rate as a function. Expected investment return have an effect on exchange rate fluctuations:a unit of domestic currency put into local currency markets and foreign currency markets at the same time, there has different expected investment yields, because of different interest rates and expected exchange rate, which thereby affecting exchange rate fluctuations between the two countries.Based on this, we use the data of China and US’s money supply, interest rate、output during the year of2005-2008to analysis exchange rate fluctuation. The results showed that:The expected investment yields of RMB relative to the expected investment yield of dollar increases1%, the exchange rate will appreciate0.008863%. In addition, China’s money supply growth rates relative to the U.S. money supply growth rate increases1%, the exchange rate will appreciate1.407367%; China’s real output growth relative to the U.S. real output growth rate increased1%exchange rate will appreciate0.123253%.The content of this article is divided into six parts. The first chapter clarifies the research background and research framework. The second chapter is literature review mainly describes the major Western theories of exchange rate determination, and the major RMB exchange rate empirical research in Western Exchange Rate Theory. The third chapter analyzes the relationship between the relative supply of money, expected investment returns and exchange rate fluctuations, then establish a theoretical framework which affecting RMB exchange rate fluctuation. the fourth chapter introduce US and China relative money supply and exchange rate fluctuations Since the financial crisis. The fifth Chapter is empirical testing, combined with the above findings carrying on empirical estimates. Chapter sixth for the full conclusion, this paper summarizes the main conclusions and propose appropriate policy recommendations.