A Study Of Regime-Switching In RMB Exchange Rate Fluctuations

Exchange rate changes determine both the internal and the external equilibrium of a country’s economy. A floating exchange rate system based in Jamaica became the main international currency system after the collapse of the Bretton Woods system in the1970s, while most developed countries such as America, Japan and Germany all chose the floating exchange rate regime, thus resulting in complex exchange rate fluctuations and intensified risk and difficulty of international businesses and organizations’foreign exchange management. The analysis of the fluctuations and characteristics of the exchange rate mechanism is particularly important to monetary policy and investment decisions. RMB has been pegged to the dollar before the reform the exchange rate system in2005, which to some extent limits the fluctuation of the RMB exchange rate, bringing great opportunities for China’s export-oriented economy while concealing many potential dangers for the stable development of domestic economy at the same time. Under this increasingly global economy environment, the implementation of the reform of the RMB exchange rate market is China’s top priority.This paper focuses on constant adjustments and transitions in China’s foreign exchange market and changing economic laws which may lead to structural changes in the foreign exchange market, considers the time variability of exchange rate fluctuations, combines the Markov transition mechanism and advanced econometric methods into exchange rate studies on the basis of theoretical and empirical research at home and abroad. This paper selects monthly USD/RMB exchange rate data from January1990to June2013for empirical research, with the econometric tests to reflect nonlinear characteristics of time series data and Markov switching model to fit the specific form of exchange rate fluctuations, and describe different states of exchange rate fluctuations. The study finds that exchange rates at different times show different states; there is a clear conversion relationship between the states; the average duration of different states are different. This essay attempts to explain the exchange rate regime switch from the perspective of economic growth, balance of payments, psychological expectations, international political and economic situation as well as the critical point of change of state. Based on above, the paper at last proposes policy recommendations to promote the market process of exchange rate system and suggestions to deal with the pressure of RMB appreciation.