Transparency matters: Public vs. non-public use of the counter-cyclical factor and renminbi exchange rate volatility

The counter-cyclical factor (CCF) is a distinctive foreign exchange policy tool used by China to mitigate procyclical volatility in the renminbi (RMB) exchange rate. This study categorizes the implementation of the CCF into three distinct phases – first public, second public, and non-public – and assesses its impact on RMB exchange rate volatility during these periods. Using the HAR-CJ model, we decompose volatility into Heterogeneous Autoregressive (HAR) and jump components, while also differentiating between upside and downside semi-variances to provide a more detailed evaluation of the CCF’s effectiveness. The empirical results indicate that the public application of the CCF is more effective in stabilizing RMB exchange rate volatility, suggesting that a non-transparent foreign exchange policy is less capable of achieving the monetary authority’s objectives. Furthermore, the CCF significantly influences the jump component only during the second public phase, exhibiting an asymmetric effect: it reduces upside jumps while exacerbating downside jumps, with the latter effect being more pronounced.