The Impact Of FED's Monetary Policy Of Raising Interest Rate On The Fluctuation Of The RMB Exchange Rate

After the global financial crisis,the United States lowered the federal funds target rate to zero in a short time to boost the economy and this monetary policy lasted for nine years.With the US economy taking the lead in recovery,the Fed officially began improving interest rate in late 2015.Since US dollar is at the core of the world monetary system,the shift of US monetary policy will inevitably have a major impact on intricate global economic and financial markets and the currency exchange rates of many countries will be affected.The formation mechanism of Chinese RMB exchange rate is at an important stage in reform and internationalization,so market forces are becoming more and more important in this progress.As a result,the Fed's tight-money policy will inevitably aggravate the fluctuation of RMB exchange rate and significantly affect the trend of China's currency exchange rate.This paper studies through the combination of theory and empirical evidence.First of all,it sorts out and summarizes the literature on the impact of exchange rate decisions and monetary policy on exchange rate fluctuations,and reviews the contributions and shortcomings of existing literature.On this basis,the relevant theories are studied,including the definition of the normalization of monetary policy and the change of RMB exchange rate,the analysis of the goals,implementation methods and transmission paths of the Fed's interest rate hike policy,and the relevant theoretical basis about how interest rate hike affects the RMB exchange rate..Secondly,this paper conducts a qualitative study on the impact of the Fed's interest rate hike policy on RMB exchange rate fluctuations,analyzing the characteristics of the Fed's interest rate hike cycle,the characteristics of RMB exchange rate fluctuations during the interest rate hike cycle,and the impact of interest rate hikes on RMB exchange rate fluctuations.After the route,it is concluded that the Fed's interest rate hike will exert depreciation pressure on the RMB through different channels.Thirdly,this paper tests the results of theoretical and qualitative research through empirical analysis.The paper constructs a VAR model including US federal funds rate,RMB central parity,Sino-US spread,short-term cross-border capital flows,asset prices and exchange rate expectations.The following results are obtained by impulse response analysis and variance decomposition.The Fed's interest rate hike policy will lead to the depreciation of the RMB.This effect was mainly reflected in the early expansion of the spread of Sino-US spreads and the narrowing of the scale of short-term cross-border capital inflows.At the same time,the transmission channel of asset prices played a role in the middle and late stages.The effect is more significant.The stock market has a certain time lag on the foreign exchange market through factors such as market sentiment and liquidity.The expected channel transmission effect is relatively weak,which may be related to the fact that the controllability of the exchange rate market is stronger than the RMB NDF market.Finally,in order to reduce the impact of the Fed's interest rate hike policy on the fluctuation of the RMB exchange rate,this paper proposes a series of policy recommendations,including strengthening the expected management of the RMB exchange rate,ensuring the stability and rationalization of the RMB internationalization process,maintaining stable and healthy economic growth,and making flexible Exchange rate policy and the ability to strengthen the RMB against external shocks.The main innovation of this paper is that,firstly,it is of great timeliness and practical significance to study the impact of the Fed's new round of tight-money policy on the RMB exchange rate.Second,most of the existing literature about the impact of the US monetary policy on exchange rate changes is based on qualitative research.In this paper,the VAR model is used to conduct empirical tests on a qualitative basis,so that the results of the research are more credible and more evidence-based.