The Empirical Study On The Effect Of REER Volatility To RMB Internationalization

RMB internationalization is the only way for China to fully integrate into the globalization of economy and finance,it is not only necessary but also urgent(Wang Yuanlong,2009).Premier minister Li Keqiang delivered the government work report at the fourth conference of the 12th National People's Congress in 2016,emphasized that it's important to continue improving the formation mechanism of the renminbi exchange rate market,keep the renminbi exchange rate basically stable at a reasonable and balanced level,and simultaneously play the unique advantages of Hong Kong and Macao to enhance their status and function of the country's economic development and opening to the outside world.China's 13th Five-Year Plan also proposed to strengthen the global support for offshore RMB business in Hong Kong hub,thus it can be seen that renminbi internationalization has attracted increasing attention of state and government.Since the late 1990s renminbi gradually accepted and used by the neighboring countries,thus start the process of internationalization of the RMB and then RMB internationalization has also become one of the core contents of the current China's financial reform.As the global second largest economy and the world's largest trading nation,renminbi with 10.92%of the weight had become the IMF Special Drawing Rights(SDR)currency basket in the third-largest currency more than the pound and the yen in December 1,2015.And RMB became the international reserve currency from the paying and trading currency,this is also the key and primary achievement in the process of renminbi internationalization since the lauch of pilot RMB settlement in cross-border trade in 2009.However,for the moment,the internationalization of RMB is still a long and gradual process.The main research purpose of this paper is to explore how the REER volatility affect the renminbi internationalization,so as to provide the appropriate policy advices for government and country.Firstly,this paper empirically analyzes the long-term driving factors which will affect the renminbi internationalization and builds the econometric estimation model on this basis.Secondly,we uses the GARCH model to measure the REER volatility on the basis of Behavioral Equilibrium Exchange Rate Theory.Lastly,we employ the GMM estimator to investigate the empirical relationship between the REER volatility and the internationalization of the renminbi in the period from 2002Q1 through 2015Q2 and use the VAR model to analyze the further relationship within the variables.Main results are as follows.REER volatility plays an important role in RMB internationalization and has significantly negative influence on the internationalization of the RMB.Taking into consideration the impacts of foreign exchange reserves,exchange rate system reform and the international financial crisis,the above conclusion still holds right.Through the impulse response function analysis,we get that the response of RMB internationalization is the most significant to a standardized structural shock coming from itself,it also shows that the currency inertia has a positive effect to the renminbi internationalization;no matter in the long or the short term,the negative effect of the REER volatilitty to renminbi internationalization is lasting;"Positive to negative"characteristics show that the high foreign exchange reserves is not good for the internationalization of RMB;the influence symbols of other major variables to renminbi internationalization are in line with expectations.Simultaneously,variance decomposition results also show the important role of currency inertia and economic strength in the process of the renminbi internationalization.From the medium and long term,the contribution of REER volatility is increasing and the important influence cannot be ignored.The innovations of this paper are mainly reflected in the following three aspects:(1)existing studies which have examined the impact of exchange rate volatility on trade flows and foreign exchange reserves on the international currency are more,but less literatures have associated the exchange rate fluctuations with international currency.This paper has a breakthrough in the research perspective that we investigate how the REER volatility affect the renminbi internationalization;(2)traditional literatures always use the standard deviation from the exchange rate datas to measure exchange rate fluctuations,however,we apply the macroeconomic fundamentals variables to fit the REER based on the Behavioral Equilibrium Exchange Rate theory.It means that we build the mean equation of GARCH model,furthermore,we use the conditional variance from the variance equation to measure the REER volatility;(3)we employ the GMM estimator to overcome the potential problem of endogeneity.Due to the process of renminbi internationalization is starting relatively too late,it makes the domestic research in renminbi internationalization is relatively too late,especially from the view of exchange rate volatility,this paper makes up for the inadequacy of this aspect.the research will help to deepen understanding of the process of RMB internationalization,at the same time provide theoretical support and empirical basis for the government to formulate the corresponding monetary policy and exchange rate policy.