The Impact Of US Quantitative Easing Monetary Policy On RMB Exchange Rate

After the outbreak of the 2008 financial crisis,the Federal Reserve used conventional monetary policies to promote the recovery of the US economy.After cutting the federal funds rate six times,the long term interest rate was nearly 0,but the US economy had no sign of recovery.Thus,the US economy was in a liquidity trap,and the Federal Reserve finally decided to take unconventional monetary policy—Quantitative Easing monetary policy at the end of 2008 to save the US economy.In the next five years,the Federal Reserve implemented another three rounds of Quantitative Easing monetary policies.The implementation of Quantitative Easing monetary policies saved America's financial market,relieved the pressure of economic downturn,and promoted the recovery of the US economy.Under the trend of economic globalization,emerging markets were affected by the QuantitativeEasing policy as well.For instance,China,as a huge import-and-export country,was inevitably affected,and the most obvious effect is the effect on the exchange rate.As to the selection of variables,I choose four variables after analyzing related theories.These variables are the relative monetary base growth rates,relative CPI levels,relative GDP levels,relative interest rate levels,and the volume of foreign exchange reserves of China.Relative monetary base growth rate is used to weigh the direct influence of quantitative easing monetary policies since the implementation of quantitative easing monetary policies will enlarge the scale of monetary base.Relative CPI level of both countries is used to weigh price level that is influenced by the implementation of quantitative easing monetary policies.Relative GDP level of both countries is the primary determinant of long-term exchange rate.Interest rate level of both countries is used to weigh the attraction of currency in the short term.The volume of foreign exchange reserves is used to weigh the capital control of the Chinese government.As to the selection of empirical model,I choose to use the vector auto-regressive model(VAR)to study the dynamic relations of the RMB exchange rate against US dollar and other variables.The reason for it is that the vector auto-regressive model is used to study the dynamic relations of a set of variables and many macro variables have a interrelation.Therefore,it is appropriate to use the vector auto-regressive model.According to the results of the thesis,I found that the interest rate difference is effective in adjusting the exchange rate in the short run,effects brought by comparative price level are inconsistent with the purchasing power parity,the foreign exchange reserves are useful to keep the exchange rate float within a certain range,the enlargement of monetary base has no obvious effect on the exchange rate in the short run,and the GDP level is the determinant of the exchange rate in the long run.Based on this,I also discussed the impact of Quantitative Easing exit policy on the exchange rate of RMB against dollar,and then gave some policy suggestions on how to face this challenge.