| Nowadays,China is accelerating the formation of the “dual circulation” development pattern in which domestic economic cycle plays a leading role while international economic cycle remains its extension and supplement,and to achieve high-quality development of the Chinese economy,ensuring domestic financial stability is a necessary prerequisite.In recent years,China has continuously improved the RMB exchange rate formation mechanism,deepened the marketization and internationalization reforms of the exchange rate,the foreign exchange market has developed rapidly,two-way fluctuations in the RMB exchange rate have become normal.Exchange rate fluctuation can affect domestic financial stability through the channels such as cross-border capital flows and international trade.With the deepening of the economic linkage between countries and regions in the world,the capacity for risk contagion in the foreign exchange market has increased.To safeguard the domestic financial stability in the current context of complex and changing global economic conditions,it is necessary to clarify the impact and transmission mechanism of exchange rate fluctuation on financial stability.Based on the special status of exchange rate in international finance and trade,this paper made an in-depth research of how exchange rate fluctuation effect domestic financial stability,follows the research design of “Review of the theoretical basis,domestic and international literature → Empirical analysis with the effect of exchange rate fluctuation on multidimensional financial stability→Analysis of the transmission mechanism of exchange rate fluctuation on financial stability→Analysis the effects of macro-prudential policy to regulating exchange rate fluctuation”.Under the current background of RMB exchange rate fluctuation and the global economic situation,this article reviews the development history of the exchange rate and the related theories of financial stability,clarifies the relationships between the research objects.This paper based on mathematical models and exchange rate price pass-through theory to research the transmission mechanisms of exchange rate fluctuation on financial stability,constructs a two-stage multi-country model to examine the effects of macro-prudential tools adjustment on exchange rate fluctuation.This paper by reviewed literature on the impact of exchange rate fluctuation on financial stability,transmission mechanisms of the cross-border capital flows and the international trade,the effectiveness of FX-related macro-prudential tools laid a theoretical foundation for subsequent research.Based on theoretical and literature analysis,this paper employs empirical methods to explore the impact and transmission mechanism of RMB exchange rate fluctuation on domestic financial stability,and the effect of macro-prudential tools on exchange rate fluctuation,then put forward relevant policy recommendations.The main research contents,methods and findings in this article are as follows:Firstly,this paper selected high-dimensional variables which covered multiple information form economic fundamentals and financial markets,based on the TVP-SFAVAR model to extract common factors,which could reflect the economic and financial fluctuations,then described the time-varying impact of exchange rate fluctuation on the common factors of economic fundamentals and financial markets.This paper finds that: the shock of the exchange rate to economic fundamentals and financial markets is significant time-varying,and the effects is different in the short-term and long-term.Appreciation and depreciation of exchange rate trend both have promotion effect on economic fundamentals and financial markets.We based on the NARDL model to deeply analyze the asymmetric effect of the two-way shocks of RMB exchange rate on economic fundamentals and financial markets.The results show that the impact of exchange rate appreciation is greater and significantly in the long-term.Secondly,this paper based on the view of financial sub-markets,calculate volatility spillover indices with time-varying characteristics by use of the variance decomposition in the TVP-VAR model,construct a financial sub-market volatility spillover network and analyze the risk spillover effects of foreign exchange market volatility.The empirical results show that: there exists significant time-varying spillover effect between foreign exchange market and other financial markets,the capacity of risk contagion in the foreign exchange market significantly increased during extreme events such as the Sino-US trade friction and the COVID-19 pandemic,but it shows heterogeneity both on direction and degree.Furthermore,we explored the influencing factors of risk spillover in the foreign exchange market.The research results show that the effect of US monetary policy has decreased,the reform of the exchange rate regime and improvement of the trade openness have significant contribution to the volatility spillover.The economic policy uncertainty during the crisis will enhance the risk spillover effect.Thirdly,about the research of the transmission mechanism of exchange rate fluctuation to financial stability,we analyzed the dynamic relationships among exchange rate fluctuation,capital flows and financial market,answered the question of how RMB exchange rate fluctuation affect financial market through international capital flow channels.The impulse response function results show that there is a time-varying interaction among exchange rate fluctuation,capital flows and financial markets.The shock of the exchange rate has significant positive effect on liquidity in the financial markets.The transmission mechanism of exchange rate volatility on financial stability through cross-border capital flows mainly depends on the capital inflow channel,which could amplify the impact of exchange rate fluctuation,the capital outflow affect mainly shows in short term.Then we compared the heterogeneous characteristics of the interdependencies among exchange rate fluctuation,capital flows and financial market under different regimes by using the MS-VAR model.The research results indicate that exchange rate fluctuation significantly affect financial market through capital inflow channel during stable periods.In the periods of exchange rate volatility,financial markets are mainly affected by the negative impact of capital outflow.Fourthly,according to the theory of the exchange rate price pass-through that exchange rate fluctuation could affect the price level of import and export,because of the differences in international trade among industries,we choose to explore the international trade channels of the impact of exchange rate fluctuation on financial stability at the industrial level.Through the panel data model regression,we found that exchange rate fluctuation and trend will deduce the industrial financial stability,the impact of exchange rate appreciation is greater,industrial financial markets have increased the ability to resist the negative impact of exchange rate fluctuation by the reform of the exchange rate system.In the examination of transmission mechanism of international trade channel,we found the impact of exchange rate fluctuation on industrial financial stability has a significant moderating effect of export price,and the transmission mechanism of international trade has a significant threshold effect.Industrial financial stability can smooth the impact when exchange rate fluctuation in a low level.Based on industrial categories analyze,we found the impact of exchange rate fluctuation is heterogeneous between different types of industries,technologyintensive industries are less affected,resource extraction and labor-intensive industries have significant import and export price moderating effects.Fifthly,given that exchange rate fluctuation has a significant impact on financial stability.This paper investigates the impact and transmission mechanism of macro-prudential policy on exchange rate fluctuation,by using the Qual VAR model to estimate the continuous policy variables,and explores the pathways through macro-prudential tools to exchange rate fluctuation.Then based on the framework of “two-pillar” to study the effect of macro-prudential policy by using the SLP model.The results show that: The influence of reserve requirement ratio for foreign currency deposits on exchange rate fluctuation has a time-varying characteristic.The impact of the reserve requirement ratio for foreign currency risks on exchange rate fluctuation is presented as negative and short-term effects.Counter-cyclical factor positively affects exchange rate fluctuation.We found that the influence of transaction channels is greater than the expected channels by comparing the impact channels of macro-prudential tools.The coordinated implementation of macro-prudential policy and monetary policy can effectively suppress the negative impact of monetary shocks on exchange rate fluctuation in the short term,and will also increase the response of exchange rate to policy in the short term.The research in this paper shows that exchange rate plays a significant role and function in financial development.Exchange rate fluctuation can impact financial stability with the transmission mechanisms of cross-border capital flows and international trade.Therefore,it is necessary to pay more attention to the dynamic fluctuations of the RMB exchange rate,emphasize the importance of exchange rate fluctuation in economic and financial development,preventing the potential financial risks triggered by exchange rate fluctuation.Strengthen macro-prudential regulations of exchange rate fluctuation is beneficial to maintaining the stability and development of the domestic financial sector. |
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