Fluctuation Of Exchange Rate Mitigate External Shocks Impact

Nowadays, China has the more flexible exchange rate regime and opened some items of capital account .According to improved impossible triangle, it could be stability. With the quickening of the globalization process, Chinese government will realize the entirely free flow of international capital and afford larger external economy impact. Then how to avoid the influence from the external economy? The wider opening of capital account, the more flexible the exchange rate should be.Theoretical and empirical analyses are used in this essay to study the different action for float exchange rate regime and fixed exchange rate regime to the external global economic impact. In theoretical study, based on M-F model and AD-AS model, this paper shows us the float rate regime could keep the economy stable using the exchange rate fluctuation to release the external impact. And in the fixed exchange rate regime, the impact will influence the internal economy eventually. In empirical case, Korea is studied with F-test to compare the variance of two phases from 1986 to 2006.The empirical result is consistent with the theoretical one. This result supports the enlargement of exchange rate area with our capital account opening gradually to avoid the external economy impact.