Influences Of RMB Exchange Rate Changes Having On Hot Money Flow And Following Policy Suggestion

Large quantities of hot money will make a tremendous impact on a country’s financialstability, if handled improperly, it will lead to financial crisis. However, there are somedeficiencies in the prior academic research on how changes in the exchange rate of the RMBwill affect hot money flows. The ariticle make empirical research and comparative analysis,of the impact of the US dollar against the RMB spot exchange rate fluctuations on hotmoney flows and the impact of the US dollar against the RMB forward exchange ratechanges on hot money flows, by using hot money flows monthly frequency data fromJanuary2006to August2014Using CIP model as a theoretical basis, by establishing VAR model of hot money flowsby spot exchange rate fluctuations(EFS), interest rate differential(Margin) and VAR model ofhot money flows by forward exchange rate fluctuations(EFF), interest rate differential,making impulse response analysis and variance decomposition analysis seperately. we cancome out the following conclutions: firstly, hot money flow will be influenced by hot moneyflows (HMF), Margin, EFS and EFF of last one or two months. Also hot money inflowshas some trends from the VAR containing the EFF. That is to say: hot money flow willincrease as the increasing of hot money flow of last one or two month as well as the widen ofinterest rate differential of last month, while it will decrease as the widen of interest ratedifferential of last two months with a significant recent effect, as well as the devaluation ofRMB of the last one or two months. Secondly, compared to the VAR model including thespot exchange rate fluctuation, the VAR model including the forward exchange ratefluctuation is better, so the impact of exchange rate movements on hot money flows is moreimportant. Thirdly, according to the impulse response analysis, interest rate differential, thespot exchange rate fluctuation, and the forward exchange rate fluctuation all have a longterm impact on cross-border flows of hot money. Finally, the fluctuations of HMF can beattributed to the impact from82%on HMF itself,7.0%on Margin and11%on EFF.Based on these conclusions, the following policies are recommended: first, control theexchange rate expectations by increasing the range of exchange rate fluctuations and foreignexchange market operations, and also make forward-looking policies. Second, improve theinternational payment balance detection system, the development of emergency plans of hot money flows and the establishment of cross-border monitoring and early warningmechanisms to strengthen the detection and statistics of changes in foreign exchange. Third,promot the process of marketization of interest rates, and reduce the huge cross-border flowfluctuations caused by interest rate differentials gradually. Last, while forming the policies,the time lag of policy and the influence of the movements of exchange rate and interest rateshould be considered.