RMB Real Exchange Rate, Short-term International Capital Inflow And Stock Price

Since 2005 China began the reform of exchange rate in our country, the RMB against the dollar began to unilateral appreciation on the road, and the prosperity of the capital market also provided a hotbed for investors to obtain high profits. In order to maintain exchange rate stability, the central bank intervene the foreign exchange market in recent years frequently, so the foreign exchange lead the monetary base to increase on the main channel in our country, in order to maintain the domestic money markets, central banks had to take a variety of means to reverse the foreign exchange caused by the excess money supply. However, in the face of huge foreign exchange reserves, the difficulty of the central bank adopting the sterilisation method is also increasing. Prior to 2008, with the rising of RMB exchange rate and short-term capital inflows, the capital market in our country, especially in the stock market has also undergone a vigorous rising process, the prosperity of the capital market also attracts more international capital. After the financial crisis, China stock market crashed, and accompanied with the real estate market also appeared a volatile situation, the macroeconomic stability in China caused a significant impact. Therefore, research about the relationship among RMB exchange rate, short-term capital and asset prices is of great significance.At first, this paper builds a dynamic model among RMB real exchange, short-run capital flow and stock price. By selecting three indicators of RMB real exchange rate, short-term international capital and the Shanghai composite index, we try to find out the dynamic relationships among the three variables theoretically; Then by using the BDS test, we try to determine whether a model has nonlinear characteristics or not. At last, we use the TVP- VAR model in August 2005 to December 2013, during the monthly data for empirical research, to analyze nonlinear interaction of these variables from the long-term.Based on the perspective of nonlinear, by using time-varying parameter vector auto regression model, we analyzed the interaction among asset price, the short-term international capital and RMB real exchange rate. The empirical results show that the traditional constant parameter model estimation results are not suitable, the increase of RMB real exchange rate has obvious influence on short-term international capital. However, it exists obvious difference in long-term and short-term, exchange rate has positive influence on asset price. The impact of Short-term international capital on exchange rate decreased significantly after the financial crisis. In addition, the impact size is different among variables in different periods, after the financial crisis, the impact of response amplitude decrease to some extent.In view of the above results, this paper puts forward the following suggestions: First, establish and perfect dynamic early warning mechanism of short-term capital flows, exchange rate of attention on the two-way effects of capital flows; to further implement and improve the mechanism of the exchange rate reform; to establish cooperation with the various countries’ government regulation mechanism; improve the stock market investors structure, etc.