Exchange Market Pressure And Interest Rate Under Capital Liberalization

Ever since the beginning of reform and opening up in 1978,China has been opening to the outside world and the pace of financial reform has gradually moved forward.Along with the process of reform,China has achieved a series of reforms: China joined the WTO in 2001,became the world's largest exporter by 2010,and the RMB was included in the special drawing rights in 2016,China's GDP ranked second in the world in 2018.Along with the continuous deepening of reforms,China's economy has gradually become more closely linked to the global economy,with enhanced national strength and increasing international discourse power.However,behind all the good news as the results of a series of reforms,the stability of the economic system cannot be ignored.Especially in the current international situation where China faces macroeconomic downturn and complex and ever-changing international environment,it requires the coordination of foreign policy and internal policy.Since the exchange rate was merged in 1994,the central bank's foreign exchange intervention has played an important role in ensuring the stability of the RMB exchange rate.The foreign exchange market pressure is a direct reflection of the imbalance in the foreign exchange market and the interest rates reflects the internal currency value.Hence,the exchange rate market pressure is connected with interest rate through capital account opening.Therefore,from the perspective of capital account opening,studying the interaction between foreign exchange market pressure and interest rate not only provides assistance for the central bank to intervene in the foreign exchange market and formulate monetary policy,but also has reference significance for arranging the order and rhythm of reform.This paper first reviews the history of China's capital account opening,summarizes the current situation,and then measures the degree of openness of the capital account at the actual level.It is found that China's capital account opening is generally in a progressive open state.Then it measures the pressure index of China's foreign exchange market and finds that the RMB is facing a strong depreciation pressure at present.Based on the measured foreign exchange market pressure,the process of China's exchange rate system reform and China's macroeconomic situation from 2002 to 2018 are proposed.It is found that the pressure on the foreign exchange market can reflect the actual changes in the flexibility of the exchange rate system and can reflect the changes in China's macroeconomic situation to a certain extent.Then the article analyzes the interaction between foreign exchange market pressure and interest rate.According to the results of theoretical analysis,using the measure of capital account openness and foreign exchange market pressure index,empirically study the capital account open perspective under a time-varying framework.On the interaction between foreign exchange market pressure and interest rate,the empirical results have the following conclusions:(1)In the capital account opening process,the transmission mechanism of interest rate pressure on the foreign exchange market will not change;(2)in the process of capital account opening,the impact of exchange rate market pressure on interest rate increases as the openness of the capital account grows;(3)The direct effect of capital account opening on foreign exchange market pressures and interest rates is enhanced by the deepening of internal and external reforms.Finally,based on the comprehensive and in-depth study of the interaction between foreign exchange market pressure and interest rate from the perspective of capital account opening,combined with China's specific situation,the article puts forward corresponding policy recommendations from the aspects of prudent opening of capital account,reform order and the deepen of economic reform.