Influence of RMB Exchange Rate System Evolution on Short-term Capital Flows in China——Based on the Perspective of Exchange Rate Expectations and Exchange Rate Volatility

Abstract

Abstract:

This paper uses the ARCH model to get the characteristics of the RMB exchange rate volatility and the expected rate of change. Then it uses DCC-GARCH model to analyze the relationship between RMB exchange rate volatility & the expected rate of change and international short-term capital flow in China. Finally, nonlinear Granger causality test method is used to thoroughly study the RMB exchange rate volatility and expected RMB exchange rate relationship between the exchange rate and the international short-term capital flow. The result shows that:no matter at all stages of the whole sample period or in the process of exchange rate marketization, the expected change rate of RMB exchange rate has significantly greater effect on international short-term capital flow compared with RMB exchange rate volatility. Especially after the reform of the exchange rate mechanism in 2005, along with the change of RMB exchange rate flexibility, the international short-term capital flows and the RMB exchange rate are expected to have significant two-way interaction between the rate of change and international short-term capital flows and the reversed transmission of international short-term capital flows on expected rate of change of the exchange rate should be paid sufficient attention to.

Key words: international short-term capital flows, expected rate of change of the exchange rate, exchange rate volatility, DCC-GARCH model, nonlinear Granger causality test

Tian Tao. Influence of RMB Exchange Rate System Evolution on Short-term Capital Flows in China——Based on the Perspective of Exchange Rate Expectations and Exchange Rate Volatility[J]. , 2016, 28(6): 65-75.

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