Munich Personal RePEc Archive

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

Liu, L. and Ni, Y.J (2009): Foreign Exchange Market Pressure and Monetary Policy: An Empirical Study Based on China’s Data. Forthcoming in:

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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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