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The Impact of Monetary Policy Shocks on RMB Exchange Rate Fluctuations

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DOI: 10.23977/statqe.2019.11001 | Downloads: 15 | Views: 1007


Shizheng Li 1,2, Zhongming Ding 2, Xiaoxue Zhang 3, Ruifeng Mao 4


1 School of Management, Hefei University of Technology, Anhui, Hefei, China
2 School of Finance, Anhui University of Finance and Economics, Anhui, Bengbu, China
3 School of Management Science and Engineering, Anhui University of Finance and Economics, Anhui, Bengbu, China
4 Hefei Central Sub-branch, The People’s Bank of China, Anhui, Hefei, China

Corresponding Author

Zhongming Ding


Research on the monetary and the exchange rate policy is constituted by reasonable measurement of the relation between those policies and exchange rate fluctuations. In this paper, we employ the structural vector autoregressive (SVAR) model and the symbolic vector autoregressive (VAR) model and combine short-term and long-term restrictions, to establish the impact of monetary policy shocks on the RMB real effective exchange rate index. We avoid both the selection problem of traditional recursive structure variable order, as well as the improper contemporaneous restriction problem of structure decomposition. Taking China’s monthly data as the object of study, we performed an empirical study and the results show that. First, the identification methods of the two VAR models provide consistent results and these are more robust than the results of recursive decomposition. Second, the impact of monetary policy shocks on the RMB real effective exchange rate index leads to both the foreign exchange rate puzzle and the overshooting puzzle. However, the period of overshooting is obviously earlier. The impact of monetary policy shocks on output plays a positive role in the short-term, but, in the long-term, it manifests as raising the level of output. The impact of monetary policy shocks does not lead to the price puzzle and the proportion of a rise in price is the same as that of monetary expansion. According to the variance decomposition on the future forecasts of the RMB real effective exchange rate index, we find that the explanatory proportion of monetary policy shocks is about 20% between the estimates of foreign literature. Finally, we test model robustness and found that the results do not change with the increase of variables or the maximum number of restriction phases.


Monetary policy shocks, Structural vector autoregressive, Sign restriction, Foreign exchange rate puzzles, Symbolic vector autoregressive


Shizheng Li, Zhongming Ding, Xiaoxue Zhang, Ruifeng Mao, The Impact of Monetary Policy Shocks on RMB Exchange Rate Fluctuations. Statistics & Quantitative Economics (2019) 1: 1-18. DOI:


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