The Research On The Relationship Between Exchange Rate System And Currency Mismatch

Exchange rate system is an important open macroeconomic policy. It directly affects one country’s financial stability and long-term economic growth. In the context of financial globalization, currency mismatch makes the emerging market countries more difficult to choose exchange rate system. This thesis takes China and India for example, studies on the relationship between exchange rate system and currency mismatch.The empirical results show that both China and India have a more flexible exchange rate system, and gradually weaken the impact of the dollar on their exchange rate. Changes of the exchange rate system in different periods have different effect on currency mismatch. When China changed its exchange rate system from fixed exchange rate system to managed floating exchange rate system which consulting a basket of currencies in 2005, the change on exchange rate system increased China’s currency mismatch. At the end of 2014, both countries’ exchange rate system had changed to free floating exchange rate system. This helped China and India reduce currency mismatch.The empirical results also show that currency mismatch has impact on the change of exchange rate system in China and India. This is consistent with the “Conflicted Virtue” and “Fear of Floating” which said serious currency mismatch will restrict the choice of exchange rate system.Through the research of the relationship between currency mismatch and exchange rate system in China and India, we found that promote the reform on exchange rate system, strengthen the foreign exchange market, strengthen the regional monetary cooperation and promote national currency becoming international currency can reduce China’s currency mismatch. Thus, the mechanism of RMB exchange rate will become more marketable.