The Research Of Interaction Between RMB Exchange Market Pressure And Monetary Policy In China

Since the exchange rate regime reform in1994, China has experienced rapideconomic growth and development of foreign trade, which leads to the rising ofexport-oriented degree and imbalance of international payments. In an open economy,external shocks have more and more influence on domestic economy of China. TheExchange Market Pressure (EMP) measures total excess demand for a country’scurrency in international market with a given expectation. It reflects, to a large extent,the external economic imbalance of China. There are close relations between EMPand monetary policy. Monetary policy and foreign exchange intervention of centralbank affect the gathering and relief of exchange market pressure, while exchangemarket pressure also has effect on monetary policy.This thesis is a research on RMB exchange market pressure and monetary policyin China, using both theoretical and empirical methods. First, on the basis of previousstudies of exchange market pressure, I use model-dependent and model-independentmethods respectively to build the EMP index of RMB, then use 2SLS and volatilitysmoothing method to estimate RMB exchange market pressure during the year from2000 to 2011, and compare the results of the two methods. The study indicates thatEMP index through both methods can reflect China’s foreign exchange marketpressure to some degree, but there is also different between them in EMP estimatedvalue and range of fluctuation. The paper argues that the model-independent EMPindex can describe the short-term fluctuation of RMB exchange market pressurebetter than the model-dependent EMP index, and help to draw consistent conclusions.Since 2000, RMB exchange market pressure has existed all the time and takes the main form of appreciation pressure，which reaches a peak before the financial crisis,and then relieves with the spread of the financial crisis, yet rises after the end of 2009with recovery of global economic.After estimating RMB exchange market pressure, Chapter 3 first analyzesChina’s monetary policy and foreign exchange intervention, then builds a VAR modelwith model-independent EMP index and endogenous variables such as China’smonetary policy variables to do empirical analysis of the interaction between RMBappreciation pressure and monetary policy variables and other endogenous economicvariables in this century. The empirical results show that there are interrelationshipsbetween RMB appreciation pressure and monetary policy variables. Domestic creditgrowth, changes in interest rate and economic growth can lead to RMB appreciationpressure, In the short term, domestic credit growth can relieve the appreciationpressure, but in the long term it may cause the appreciation pressure to increase, whilethe rising of market interest rate and economic growth may increase the pressure ofRMB appreciation. Facing with a shock of RMB appreciation pressure, domesticcredit growth rises in a short time and then negative adjustment occurs, while marketinterest rate does negative adjustment first and then rises. Both changes in the twovariables can be regarded as responses of monetary policy to RMB appreciationpressure. In addition, the appreciation of RMB also has a certain inhibitory effect oneconomic growth of China. The empirical analysis also show that there is asymmetricrelationship between domestic inflation and RMB appreciation pressure: inflation ratedoes not affect RMB appreciation pressure significantly, while RMB appreciationpressure may cause domestic inflation rate to rise to some degree.Finally, on the basis of the analysis in the front, the paper summarizes the causesand influences of RMB appreciation pressure, and puts forward some policy measuresto relieve RMB appreciation pressure. The paper maintains that in order to relieve anderadicate RMB appreciation pressure, policy authorities of China should take measures from both the short-term and long-term. Firstly, expand the flexibility ofRMB exchange rate gradually, and promote market-oriented reform of the RMBexchange rate and interest rate. Secondly, maintain the steady growth of domesticcredit, improve sterilized intervention, innovate policy tools, and enhance theindependence and effectiveness of monetary policy, in addition, strengthen thecoordination of macroeconomic policies. Finally, from a long-term perspective weshould transform economic growth mode, speed up the upgrading of industrialstructure and technological innovation, improve the quality of economic development,and resolve appreciation pressure during dynamic development of the economy,improve internal and external equilibrium and coordination of economy in China.