A Theoretical And Empirical Analysis On Relationship Between Money Supply And Exchange Rate In China

For a long time,the governments of various countries have always regarded the exchange rate as the key point of macroeconomic regulation and control.The exchange rate is a barometer of foreign economic and trade activities,it changes can reflect the basic conditions of the economic operation of a country.With the gradual reform of the RMB exchange rate system,the exchange rate fluctuation of the RMB has increased,and the monetary policy and exchange rate policy have shown a strong linkage,which has greatly increased the difficulty of the central bank's operation.At the same time,according to the traditional theory,it is difficult to explain the relationship between money supply and exchange rates in the past decade in China.Therefore,the exchange rate transmission mechanism should be clarified,the monetary policy represented by the money supply quantity should be clearly defined and the dynamic relationship between the monetary policy should be clearly defined,and measures can be taken to prevent excessive fluctuations in the marketization process of the RMB exchange rate and affect market stability.According to the traditional theory,from the point view of the value of money,there is a reverse trend between the money supply and the exchange rate;from the perspective of the capital nature of money,both show a trend of change in the same direction.Therefore,it has resulted in the exchange rate showing a state of volatility,there is no strict relationship with the money supply in the same or opposite direction.From an empirical perspective,there is a stable co-integration relationship between money supply,interest rates,and exchange rates.However,money supply and exchange rates do not interact with Granger causality.At the same time,both interest rates and money supply will have an impact on exchange rate fluctuations,but both have little effect on them,and monetary policy adjustments have not effectively affected exchange rates.Finally,changes in the exchange rate cannot result in changes in the money supply,and exchange rates have a greater impact on interest rates.