Research On The Impact Of RMB Reverse Substitution On The Monetary Policy

With the development of global economic integration, the dependence betweenChina’s economy and world economy continues to deepen. As a result, the possibility ofChina’s economic performance, monetary policies and fiscal policies being impacted byexternal economic is increasing gradually. Currency substitution, which is a monetaryfluctuation of an open economy, will affect a country’s money supply and domestic assetprices through affecting its residents’ relative demand for local and foreign currency andinternational capital outflows or inflows. This disrupts the normal financial order, impairsmonetary authority’s control over the financial system and further has an adverse impacton a country’s monetary policy goals.Based on a review of relevant theory and literature, this article calculates the degreeof RMB substitution and RMB reverse substitution in China and analyses the economiceffects of RMB reverse substitution. Under the background of China’s fast growingeconomy and the strong expectation of RMB appreciation, the reverse substitutionphenomenon of RMB dominated. RMB reverse substitution has impacts on both domesticand foreign economy. After that, by using Vector Autoregressive Model for the periodfrom2003to2012, this article analyses the impact of RMB reverse substitutionphenomenon on the monetary policy empirically and it is found that RMB reversesubstitution phenomenon has an impact on China’s monetary policy. The scale of China’sinternational capital flows is limited in the case of the capital account is not open. Thus, theevent of a large-scale RMB reverse substitution cannot happen.RMB reverse substitution is inevitable in the course of RMB internationalization.With the deepening of the degree of China’s economic opening and RMBinternationalization, it will have a greater impact on China’s monetary policy. In order toreduce the adverse effects and improve the independence and effectiveness of monetarypolicy in China, this article puts forward the following strategies: optimizing the operating environment of the monetary policy, sounding the transmission main part of the monetarypolicy, and easing the transmission mechanism of the monetary policy, etc.