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Foreign Exchange Market Pressure and Monetary Policy: An Empirical Study Based on China’s Data

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  • Liu, L.
  • Ni, Y.J
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    Abstract

    The reform of exchange rate system in 2005 has settled down the floating exchange rate system with management in China. Until August this year, RMB/USD has appreciated about 16.65%. This paper measures the exchange market pressure (EMP) on RMB/USD, and use VAR model to analyze the relationship between EMP and domestic monetary policy . And from the results we find that the increase of China’s domestic interest rate of is the main cause of RMB pressure of appreciation, but the foreign interest rate has little effects on the pressure and it can affect the growth rate of China’s domestic credit. So,we deem that the theory of "ternary paradox" may not applicable to China, at least in the period of our investigation.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14491.

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    Date of creation: 10 Jan 2009
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    Handle: RePEc:pra:mprapa:14491

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    Keywords: EMP Monetary Policy Foreign Exchange Intervention VAR Model;

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    1. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, Elsevier, vol. 39(3-4), pages 273-295, November.
    2. Weymark, Diana N, 1997. "Measuring the degree of exchange market intervention in a small open economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(1), pages 55-79, February.
    3. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
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