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U.S. monetary policy uncertainty and RMB deviations from covered interest parity

Author

Listed:
  • Zhitao Lin

    (Jinan University)

  • Xingwang Qian

    (SUNY Buffalo State College)

Abstract

This paper examines how U.S. monetary policy uncertainty (MPU) affects RMB deviations from covered interest parity (CIP) and how this effect is influenced by China’s capital controls, the RMB exchange rate regime, and international reserves that constrain the transmitting channel of U.S. MPU shocks. Our findings show that U.S. MPU has a spillover effect and creates deviations from RMB CIP. Capital controls insulate uncertainty shocks and alleviate the U.S. MPU spillover effect. There are some evidences that international reserves alleviate and the liberalized RMB exchange rate regime magnifies the spillover effect. However, their effects become insignificant in the presence of capital controls. Moreover, the U.S. MPU effect on RMB CIP deviation became prominent after the 2008 global financial crisis.

Suggested Citation

  • Zhitao Lin & Xingwang Qian, 2020. "U.S. monetary policy uncertainty and RMB deviations from covered interest parity," GRU Working Paper Series GRU_2020_029, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2020_029
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    Keywords

    U.S. MPU; deviation from CIP; RMB cross-currency basis; capital controls; exchange rate regime; international reserves;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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