Study On The Relationship Between The Expansion Of The Floating Range Of Exchange Rate And The RMB Exchange Rate Fluctuation

Since joining the World Trade Organization, China have paced into the world more and more quickly. The realization of the free flow of capital must be imperative. Therefore, a more flexible exchange rate regime are needed and a floating exchange rate system has become the inevitable choice of China’s exchange rate reform. In order to adapt to economic globalization and realize smooth transition to floating exchange rate system, the People’s Bank of China announced the abolition of the original pegged to the dollar exchange rate system, began to implement a managed floating exchange rate system on the basis of market supply and demand, referencing to a basket of currencies conditioning, and adjusted the range of fluctuation of RMB against the US dollar trading price.The wealth of data since2005, nearly10years, provide a solid foundation for the empirical study of the exchange rate system reform. How did the previous fluctuations interval adjustment affect the RMB to US dollar exchange rate fluctuations? What is the effect of the reform of exchange rate system? The analysis and research on these problems is conducive to the formation of reliable and useful suggestions on the reform of the exchange rate system, and to provide helpful reference for the future to smooth the transition to floating exchange rate system and internationalization of RMB.Analysis of this paper uses a combination of theoretical and empirical, on the basis of theoretical analysis, with ARCH model and VAR model. With an empirical analysis on the volatility of the exchange rate after the reform of exchange rate system in2005, it is easy to understand the effect of all previous fluctuations interval adjustment deeply. At the same time, this paper adopts a comparative analysis since2005August to2013December data segment and make a comparison among various stages of the empirical results and thus obtains the conclusion of the study. Specifically, this article uses ARCH models to study the fluctuation of RMB exchange rate against the U.S. dollar and add a dummy variable in the ARCH model to learn the situation of the fluctuation. This model is used to fit the volatility of exchange rates. The analysis of the dummy variable coefficient can determine the effects of the previous interval fluctuations changes to the exchange rate fluctuation. And then this article use the analysis of the impulse response function and variance decomposition to judge the previous fluctuations interval adjustment effect.The analysis have drawn two conclusions. First, expanding the range of exchange rate fluctuations do affect the volatility. The ARCH family models can well fit the clustering and volatility of RMB exchange rate volatility. Second, after the exchange rate system reform in2005, the RMB exchange rate fluctuations interval is expanding with the exchange rate system reform deepening. The ability to explain the exchange rate fluctuations on its own is more and more strong, and the exchange rate itself on the impact of self-digestion ability strengthens constantly.The first innovation of this article is to study the volatility of the exchange rate reform in2005with various empirical methods. According to the exchange rate fluctuations interval changes since2005, dummy variables on the basis of the traditional GARCH model make the model more practical, but also make the results more convincing. Subsequently, Judge the effect of exchange rate fluctuations interval adjustment with the results of VAR and GARCH models. Second, this article analyses the effect of the exchange rate system reform, and provides a reliable reference for the further reform of exchange rate system from a specific angle--exchange rate fluctuations interval adjustment. Third, the latest data released by the authority of the state sector are used. The inadequacy of this paper is that the method is limited to the evaluation method. It doesn’t establish a precise mathematical model to directly measure the actual fluctuations interval required in each period, and the conclusion has certain subjectivity. In addition, this study only focuses on the RMB to the US dollar exchange rate fluctuations and doesn’t involve the exchange rate of RMB to non-dollar.