International Capital Flows And The Real Exchange Rate Misalignments

With the increasingly process of capital account liberalization,it's vital and urgent to keep the RMB exchange rate at its long-run equilibrium level.In recent years,international capital flows in China are more volatile than before,and the RMB exchange rate converts from unilateral appreciation to two-way fluctuation.International capital flows can directly or indirectly affect the exchange rate,thus it is particularly important to explore the relationship between international capital flows and exchange rate misalignment for the steady and rapid development of China's economy and the promotion of RMB internationalization.Based upon the EQCHANGE database,this paper adopts two-way fixed effect panel model to study the way net capital flows and its sub items influence currency misalignments for the 77 countries during the period of 1995-2015.This paper also further analyzes the impact of net capital flows on exchange rate misalignments under capital control and exchange rate regime.And it presents empirical evidence that net capital flows increase the misalignments,which means net capital inflows promote disequilibria when the exchange rate is overvalued and reduce misalignments otherwise.Moreover,the effects of net capital flows on misalignments varies from its sub items: equity,bond and foreign direct investment inflows increase the misalignments while derivatives inflows decrease.In addition,the real exchange rate is more likely to converge to its long-term equilibrium under more flexible exchange rate regime.Finally,controls on capital inflows in general have greater effects than controls on capital outflows.For the above findings,this paper obtains some enlightenment and suggestions as follows: since China's economy and finance system is imperfect,it is necessary to properly use capital flow management instrument;Opening up capital account accounts in a gradual and orderly manner and expanding financial openness;meanwhile,accelerating the reform of the exchange rate system and making it more flexible.