RMB Exchange Rates Fluctuations and the Difficulty in Monetary Policy Regulation

Zhou Jian, Zhao Lin

Journal of Finance and Economics Vol. 42, Issue 02, pp. 85 - 96 (2016)  DOI:10.16538/j.cnki.jfe.2016.02.008

Abstract

This paper studies the monetary policy effects by considering the influence of RMB exchange rates fluctuations based on a dynamic stochastic general equilibrium model. It constructs a theoretical model of RMB exchange rates fluctuations, China's monetary policy and their effects on macroeconomic system, and makes a policy simulation based on the calibration of model parameters. It indicates that a greater volatility of RMB exchange rates weakens the effectiveness of monetary policy regulation to a certain extent, but has somewhat different effects on responses of every variable to shocks. A greater volatility of RMB exchange rates significantly interferes in the control of monetary policy on macroeconomic demand; when RMB inflation fluctuates by a big margin, the control role of monetary policy in demand variables weakens, but the trend of responses of relevant demand variables to shocks does not be affected at different time. Bigger margin of RMB exchange rates fluctuations eases up the negative effect of the rise in interest rates on the export, and is conducive to the relief of negative shocks of monetary policy to the export, but results in further deterioration of terms of trade (the ratio of export prices to import prices).

Keywords

RMB exchange rates fluctuation; macroeconomic system; DSGE model; monetary policy