The report of the Nineteenth National Congress of the CPC and the 2018 Central Economic Work Conference clearly pointed out that " maintaining the basic stability of RMB exchange rate at a reasonable and balanced level”. Therefore, while enhancing exchange rate flexibility, maintaining the orderly fluctuation of RMB exchange rate at the level of agreed equilibrium will be an important issue to the monetary authorities.
This paper takes the monetary policy of open Taylor Rule as the framework, and endogenously implants international capital flows to examine the dynamic determinant mechanism of RMB exchange rate. In particular, we choose the sample period from July 2005 to October 2018, and adopt the TVP-SV-BVAR model to take an empirical analysis from different perspectives and periods.
The following results are obtained: (1) Both the inflow of international capital and the expansion of interest margin will boost the appreciation of RMB exchange rate in the short and long term, and the impact will increase significantly after the " exchange rate reform” in 2015. (2) The rise of inflation will also cause the appreciation of RMB exchange rate in the short and long term. However, this impact is relatively small in most periods. (3) Output increasing will lead to RMB devaluation in the short term, but it will promote RMB appreciation in the long term. Compared with other variables, the output gap has the greatest impact on the exchange rate, and is relatively stable in most sample periods. (4) The impact of exchange rate expectations on RMB spot exchange rate will be positive in the short term, but negative in the long term due to foreign exchange intervention.
The results of this paper have important implications for preventing the abnormal flow of international capital and stabilizing the fluctuation of RMB exchange rate. In particular, the decision-making authorities should implement integrated supervision of international capital flows to avoid risks or even crises arising from large-scale capital flows. Taylor Rule, which includes international capital flows, plays an important role in promoting the marketization of the exchange rate and the interest rate.
This paper expands the existing research from two aspects: Firstly, it endogenously implants international capital flows into the open Taylor Rule model and analyzes the dynamic determinant mechanism of RMB exchange rate from the theoretical level. Secondly, we utilize the TVP-SV-BVAR model to empirically analyze the nonlinear effect of Taylor Rule including international capital flows on RMB exchange rate from different points and periods. In addition, with the increasing complexity of domestic and foreign economic environment, the causes of regional heterogeneity involved in the study can be further identified.