Econometric Research On The Movement Of Exchange Rate And Policy Intervention, Currency Mismatch

With the internationalization of the RMB and marketization of interest rate, we have maderemarkable achievements in China. The world devotes more attention as China has grown to beone of the most important economies. Exchange rate as the most important factor associated toother open countries, will inevitably become a hot issue. It has both opportunities and challengesfor China’s economic and financial development. Since the foundation of new China, the RMBexchange rate has been in the process of exploration and transformation, and it has experiencedfrom the strict management to a managed floating exchange rate system. Especially since theexchange rate reform in2005, the RMB exchange rate shows a trend of increasing appreciation,and the uncertainty increases with the further amplification of the floating band in foreignexchange transactions. Although the RMB shows some rebound recently, it still has the expectedof continued appreciation in the long term.The exchange rate as a price between currencies, would be influenced by monetary policyinevitably, and will affect import and export trades for the price effect. Along with thedevelopment of the internationalization of RMB, its status in Asia and the world monetary systemincreases gradually, and Asian regional currency monetary relationship is changing, too. At thesame time, the uncertainty of the RMB exchange rate changes also is a kind of risk, and it will doimpact on China’s economy especially the currency mismatch. Based on theoretical analysis, westudy the related issues with empirical qualitative methods.Firstly, we studied the trend characteristics of RMB exchange rate. Based on theBalassa-Samuelson hypothesis, the RMB exchange rate has a rising trend. In order to describe theappreciation trend and differences between currencies of RMB fully, we built the commonstochastic trend model to study from the perspective of bilateral real exchange rate. The commonstochastic trend components ERCT estimated, comparing with the real effective exchange rateindex, is relatively more simple and effective. Besides we got the unique elements of bilateral realexchange rate, and analyzed the heterogeneous characteristics. We found that fluctuations ofbilateral real exchange rates are different, and exchange rate unique elements fluctuate around thezero point in general. The bilateral real exchange rates have great turmoil, but they enhanced convergence after the financial crisis. So the RMB performances significant market featuresgradually. We also estimated correlation between bilateral exchange rate, as characteristicingredients have deduct common stochastic trend, it would show more real mechanism of bilateralexchange rates to a certain extent.Secondly, we study the effects of monetary policy impact on exchange rate movement.Exchange rate is necessarily related to the economy, as it is the ratio between two currencies.Based on monetary policy transmission mechanism, this chapter studied the effect of the monetarypolicy on exchange rate from the Chinese and US monetary policy shocks. We built the dynamicfactor model to solve the problem when variable dimension are too many. And we identified factornumber using sign constraints methods. Specifically, we estimated the sequence of monetarypolicy impact, and analyze the dynamic path of monetary policy shocks. Then, we compared theexchange rate under the situations when estimated impact of monetary policy was zero and thereal, and further we studied the situations when interest rate considered only compared the real, tostudy the impact of monetary policy shocks on exchange rate. Finally we made comprehensivecomparison of the monetary policy impact between China and US, especially on the exchange rateof RMB against the US dollar, to draw the appropriate conclusions.Thirdly, we tested the time-varying and heterogeneity of trade spillover from RMB exchangerate. With continued appreciation of RMB after exchange rate reformed, the situation of “doublesurplus” existence in China was not significantly improved, so it is worth to further study how thelevel and volatility of exchange rate movements affect exactly on import and export trade. On thebasis of the model of international trade between the two countries, considering the exchange ratevolatility, we built time-varying parameter and panel data model to study trade spillovers, fromsum and bilateral trade level. Due to impacts of exchange rate changes on import and exportmechanism are differently, we researched imports and exports respectively. We put the realeffective exchange rate volatility into sum trade model, to research impacts of real effectiveexchange rate movements on trade. Then we built panel data model to study the impactheterogeneity of bilateral exchange rate on trade from the bilateral trade level.Fourthly, we studied the regional currency linkage mechanism of exchange rate changes andthe effectiveness of policy interventions. In an open economy, contagious financial crisis makesthe research about volatility clustering phenomenon across multiple capital markets receive moreand more attention. As Asia’s most important regional economies, China, Japan and South Koreahas a close association both in geographically and economically. Based on the reality and theimportance of financial cooperation of the Asian regional economic, this paper primarily studiesthe following aspects. First were investigated, the change in characteristics of each foreign exchange market of China, Japan and South Korea, finding that the characteristics of foreignexchange market rate fluctuations agglomeration is significantly and the time of volatilityclustering between exchange rate and the country’s interest rate is nearly consistent, so examinethe spillover effects of volatility between exchanges rate and interest rate further, and based onthat analysis the effectiveness of monetary policy of government intervention in the foreignexchange market; Further extended to multi-model, adopting MGARCH model using Choleskydecomposition, test the regional currency linkage of China, Japan and South Korea, and apply theconstraints of changes in interest rates on the model to examine the effectiveness of the economicsubjects policies of the foreign exchange market intervention, to draw the appropriate conclusions.Fifthly, from the perspective in the uncertainty of changes in exchange rate, we conducted acomparative study of the currency mismatch problem of domestic banks. Currency mismatchprovides a new perspective for the study of the currency crisis, for it reveals the infection path ofexchange rate risk among different subjects. After the reform of the RMB exchange rate, the RMBno longer “stare at” dollars and is implemented to a managed float rate, making direct or indirectcurrency mismatch risk exposure to the financial authorities which are usually called to be the"foreign exchange insurance companies’. Because the currency mismatch problems for differentdomestic banks are different, especially for the debt and debt-based currency mismatches, wedecide to classify these banks in to different categories. We also make a comparative studybetween different types of banks from the perspective of the uncertainty of changes in exchangerate. In order to solve the problem of time-varying or discrete of the model in the empiricalresearch, we use the time-varying Markov regime switching model (TVP-MS) to test theuncertainty of the rate movements. Based on the source of the uncertainty, our study is dividedinto two parts. We add the uncertainty of changes in exchange rate into the bank currencymismatch model, and test the impact mechanism of the two sources of uncertainty to the differenttypes of banks’ currency mismatch. Finally, we get the conclusions and give some policyrecommendations.