The Impact Of The Flexibility Of The RMB Exchange Rate Regime On The Independence Of China's Monetary Policy

The trilemma hypothesis under the conditions of open economy believes that in the case of free capital movement,the implementation of a fixed exchange rate system means the loss of monetary policy independence.The floating exchange rate is an indispensable condition for maintaining the independence of monetary policy.This inference has played an important role in guiding the choice of exchange rate regimes and the implementation of monetary policy.However,at this stage,many countries' economic facts and varies studies show a different situation.China is a typical emerging market country,and it is currently undergoing a full-scale reform period of exchange rate regime reform,gradual opening of capital projects,and monetary policy reform.under these circumstances,studying the actual impact of the flexibility of the RMB exchange rate on the independence of China's monetary policy is of great significance to the reform of the RMB exchange rate system and the operation of monetary policy.In the theoretical analysis part,this paper firstly studies the impact of the flexibility of the exchange rate on the independence of monetary policy at home and abroad based on the development,evolution and expansion of the trilemma hypothesis.And we classified the method of testing the independence of monetary policy.Secondly,this paper summarized the existing domestic literatures' problems on theoretical definition and empirical methods.Based on these problems,we re-defined the concept of monetary policy independence,and improved the previous empirical test methods.Thirdly,we reviewed China's exchange rate system reform and monetary policy practice,which lays a foundation for the subsequent analysis of empirical test results.In the empirical test section,this paper have studied the impact of the flexibility of the RMB exchange rate on the independence of monetary policy from two aspects,which are the influence of the RMB exchange rate regime's flexibility on the independence of interest rate policy,and the influence of the influence of the RMB exchange rate regime's flexibility on the monetary policy.When studying the impact influence of exchange rate regime flexibility on the independence of China's interest rate policy,this paper chose CHIBOR and SHIBOR as proxy variables of China's interest rate policy.When examining the influence of exchange rate regime flexibility on the independence of China's monetary policy,this paper chooses MB,M0,M1 and M2 as the proxy variables of the Chinese monetary quantity policy.Firstly,this paper constructs and measures the interest rate policy independence index,the monetary quantity policy independence index,the RMB exchange rate flexibility index and the capital flow index as substitute indicators of the three core variables of monetary policy independence,exchange rate system flexibility and capital openness.Secondly,this paper chooses China's economic growth,inflation and capital liquidity as three control variables.Finally,using these six variables,based on the VEC model,we estimated the long-term cointegration relationship,the error correction model and the impulse response function of these variables.After that we analyzed these estimation results.Through the empirical test,five main conclusions are drawn.First,the decline in the flexibility of the RMB exchange rate regime will weaken the independence of China's monetary policy.The decline in the flexibility of the RMB exchange rate regime will significantly weaken the independence of the monetary policy,and the impact on the independence of interest rate policy is small which only has a significant weakening effect on the independence of interest rate policy measured by CHIBOR.Second,the increased independence of China's monetary policy will increase the flexibility of the RMB exchange rate regime.Among them,the increase in the independence of the interest rate policy measured by CHIBOR will significantly increase the flexibility of the RMB exchange rate regime,while the increase in the independence of the monetary quantity policy will also enhance the flexibility of the RMB exchange rate system,but this effect is not significant.Third,the increase in the level of capital flows only weakens the independence of China's monetary policy,and has no significant impact on the independence of interest rate policy.Fourth,the increased independence of monetary policy will reduce the level of capital flows,but the independence of interest rate policy has no significant impact on the level of capital flows.Fifth,in the long run,the increase in capital flow will reduce the flexibility of the RMB exchange rate system.The main reason is that the frequent foreign exchange market intervention of the central bank has digested the pressure of RMB appreciation,so that the short-term capital inflow and stable exchange rate regime coexist.Finally,according to the research conclusions,this paper puts forward corresponding policy recommendations from three aspects: deepening the reform of interest rate mechanism,adjusting the intermediate goal of monetary policy and promoting the reform of exchange rate system.