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Openness and Real Exchange Rate Volatility: Evidence from China

Author

Listed:
  • Yahui Yang

    (Anhui University of Finance and Economics)

  • Zhe Peng

    (University of Guelph
    Property and Casualty Insurance Compensation Corporation (PACICC))

Abstract

In recent years, China has introduced a series of trade and financial liberalization policies and taken a crucial step towards the internationalization of RMB. These new developments bring about one question: how has openness affected the RMB real exchange rate volatility? Our empirical results reveal that in the long term, both trade and financial openness reduce exchange rate volatility; in the short term, the effect of financial openness varies across the three financial sub-accounts. Financial development can magnify (mitigate) the impact of trade openness on volatility in the short (long) term, but its role in affecting the impact of financial openness depends on the financial sub-account involved. Economic policy uncertainty (EPU) weakens the impact of openness on exchange rate volatility. In addition, financial openness absorbs more external shocks than trade openness. Foreign exchange reserves, while offsetting financial crisis shocks, cannot adequately absorb current account balance shocks.

Suggested Citation

  • Yahui Yang & Zhe Peng, 2024. "Openness and Real Exchange Rate Volatility: Evidence from China," Open Economies Review, Springer, vol. 35(1), pages 121-158, February.
    • Handle: RePEc:kap:openec:v:35:y:2024:i:1:d:10.1007_s11079-023-09718-5
    DOI: 10.1007/s11079-023-09718-5
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    More about this item

    Keywords

    Exchange rate volatility; Openness; Financial development; Economic policy uncertainty; Foreign exchange reserves;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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