An Empirical Study On The Exchange Rate Transmission Channel Of Monetary Policy In China

In the 21st century, China’s foreign trade has been developing constantly, large number of surplus of the current project and capital project has brought about a huge amount of foreign exchange reserves and the sensitive issue of RMB exchange rate. The RMB exchange rate regime has gradually become the object of international censure. In order to maintain the stable development of-China’s foreign economy and avoid the deterioration of international relations, the RMB exchange rate level control becomes very important. In 2005, China officially launched the exchange rate reform, the RMB exchange rate is not a single pegged to the dollar, China began to implement market-based, with reference to a basket of currencies, a managed floating exchange rate system, In 2010 the central bank restart the reform of the RMB exchange rate formation mechanism, With the continuous improvement of the degree of opening up to the outside world, people pay more attention to the exchange rate. The implementation of monetary policy in China is also influenced by the exchange rate, and the correlation between monetary policy and exchange rate policy is increasing.To study the exchange rate of China’s monetary policy pathway, in this paper, the exchange rate of China’s monetary policy study is based on the Taylor rule. China now use the money supply as an intermediate target of monetary policy, while the United States as the representative of the developed countries, use interest rate as the middle target of monetary policy. Due to the special nature of the Chinese economy, the Taylor rule in the open economy cannot be applied directly, and it is necessary to revise the rules of Taylor. Combined with the results of the research at home and abroad, especially Ball (1999) proposed a small open economy Taylor rule. In this paper, the modified Taylor rule is expressed as the relationship between the monetary condition index and the output and the inflation gap, On the basis of interest rate and exchange rate, the monetary policy credit transmission path index is included. Finally, this paper takes the modified Taylor rule as the model, based on the VAR model, this paper uses the unit root test, the Grainger causality test, impulse response function and variance decomposition to carry on the empirical research. Through empirical analysis, the main conclusions of this paper are as follows:the efficiency of monetary policy exchange rate has a certain degree of improvement, especially after the exchange rate reform is obvious. On the whole, the transmission efficiency of monetary policy in China is relatively low, and the role of monetary policy is lagging behind.Inthe rise of the RMB exchange rate, China’s inflation rate is also rising, the exchange rate as a way to curb inflation, the real effective exchange rate rise in the short term can reduce the inflation rate, but the effect is not significant, but in the long term will cause inflation rate rise. In an open economy, the exchange rate position and role in China’s monetary policy is more embarrassing, exchange rate policy and monetary policy conflict continue to occur. The central bank need to maintain the independence of monetary policy, based on a moderate consideration of the role of exchange rate in monetary policy.