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The RMB central parity formation mechanism: August 2015 to December 2016

Author

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  • Cheung, Yin-Wong
  • Hui, Cho-Hoi
  • Tsang, Andrew

Abstract

We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. The effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error.

Suggested Citation

  • Cheung, Yin-Wong & Hui, Cho-Hoi & Tsang, Andrew, 2018. "The RMB central parity formation mechanism: August 2015 to December 2016," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 223-243.
  • Handle: RePEc:eee:jimfin:v:86:y:2018:i:c:p:223-243
    DOI: 10.1016/j.jimonfin.2018.04.011
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    Keywords

    China’s exchange rate policy; Currency basket; Multiplicative interaction model; Onshore and offshore RMB rates; Volatility;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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