The Terms Of Trade Shock And The Choice Of China's Exchange Rate Policy

Trade conditions refer to the ratio of the export price to the import price of a country.As a measure of the quality of trade,the term of trade measures the profitability and trade gains of a country's foreign trade.The deterioration of the trade conditions means a relative loss of the national welfare of a country.In 2018,Sino-US trade friction has always been a hot topic,and the trade dispute provoked by the Trump Administration in the United States has become the biggest uncertain factor in the global economy(Zhu Min,2019).The optimal tariff theory shows that reasonable tariffs improve the trade conditions and ultimately increase the total welfare,while excessive tariffs will only arouse trade wars and cause national welfare losses.The increase in tariffs lead to a substantial change in the commodity terms of trade.Due to the unstable external trade environment,Net Barter Terms of Trade fluctuated by about 6% from the highest point of 1.02 in March 2018 to 0.94 in December 2018.The exchange rate is inseparable from the terms of trade.In 2018,with the deterioration of the terms of trade,the real effective exchange rate of RMB began to decline from May,and the onshore RMB also fell from April,once approached 7.At the same time,the related research of scholars also shows that the impact of trade conditions shock on the economy is closely related to the choice of exchange rate system.Based on the current economic background,the research goal of this paper is to study the choice of exchange rate policy under the impact of trade conditions by constructing a dynamic stochastic general equilibrium model containing the impact of trade conditions,and analyze the impact of negative fluctuations of trade conditions on economic variables,and explore whether the degree of consideration of exchange rate fluctuations in monetary policy will affect the negative impacts of trade conditions on economic variables,and whether the higher degree of exchange rate response can buffer economic fluctuations caused by external shocks.The framework of this paper mainly consists of five parts.The empirical results show that based on the estimation results of the actual observation data and the calculation of posterior mutation rate,the most important considerations in China's monetary policy are the inflation factor and the output factor,and the coefficient of concern for exchange rate stability is small,only 0.1065.The impulse response analysis shows that the negative trade conditions impact will reduce the output,the lower exchange rate fluctuation reaction coefficient make less output decline,the volatility will improve by 0.02%,and the negative trade condition impact will firstly lead to a larger inflation shock.,and then a small deflationary shock;the higher exchange rate fluctuation reaction coefficient will reduce the inflation pressure caused by the negative trade conditions shock by 0.025 percentage points,and the improvement is unapparent.Therefore,we can further increase the volatility of the exchange rate,play the important role of the elastic exchange rate as the automatic stabilizer,and increase the volatility of the exchange rate to stabilize the impact of negative trade conditions on output,without excessively worrying about the influences of exchange rate fluctuations on inflation.From the perspective of variance decomposition and historical decomposition of output and inflation,trade condition shocks contribute less to the fluctuation of variables,the contribution of technological growth shock to output fluctuations is high,and the contribution of world output and monetary policy shock on inflation fluctuation is high,so in the future we should also pay attention to technological innovation and industrial structure upgrading,and help the high-quality growth of the economy with technological progress.The innovation of this paper is the research perspective.It focuses on the relationship between the impact of trade conditions and the choice of exchange rate policy under different exchange rate fluctuation reaction coefficients in monetary policy,and explores the history of negative fluctuation of trade conditions through the historical decomposition of output and inflation.The research value of this paper is to provide a reference for China to deal with the impact of negative trade conditions,the choice of exchange rate policy and the exchange rate target of monetary policy.