Effects of Chinas Monetary Policy Shock on Exchange Rate

Abstract

This paper empirically analyzes the effects of Chinas contractionary monetary policy shocks on RMB exchange rate and bilateral exchange rates of six Asian countries and regions against the Yuan by using monthly data from 2000 to 2017 under an SVAR model with recursive short-run restrictions. The main results of this paper are as follows. Firstly, under Chinas contractionary monetary policy shock, the Yuan appreciates and the contribution of the quantitative monetary policy instrument is relatively more significant than that of the interest rate instrument while the accumulative interpretable proportion does not exceed 50%. Secondly, a delayed overshooting puzzle exists in the real effective RMB exchange rate, while the nominal effective exchange rate and the CNY/USD bilateral exchange rate present no overshooting under a positive reserve ratio shock. Finally, under Chinas contractionary monetary policy shock, some of the Asian countries show no depreciation in their currencies against the Yuan. This kind of response can be partially explained by the interest rate co-movement that offsets the depreciation effect to some extent.