Policy Choices for Chinese Exchange Rate Management under High-Level Opening-up:A Comparative Study of Responses to Two US Federal Reserve Easing Measures
Following the 2008 global financial crisis and the early 2020 global pandemic,the Federal Reserve imple-mented extremely expansive monetary policies,succeeded by contractionary phases,causing significant global economic spill-over effects.Concurrently,China shifted from quantitative interventions like foreign exchange reserve actions or capital controls to qualitative measures focusing on exchange rate management policy.This paper conducts a qualitative analysis to compare the divergences in China's responses to foreign exchange manage-ment policies on two occasions,scrutinizing both the adopted measures and the policy effects.To articulate the rationale behind China's transformation in exchange management policy,this paper starts with an exploration of the dynamic effects of the RMB exchange rate on price stability.This is achieved through a systematic Generalized Method of Moments(GMM)model based on the New Keynesian Phillips curve and a rolling regression technique.Subsequently,the paper delves into the relationship be-tween the RMB exchange rate and financial stability,formulating a China Foreign Exchange Market Pressure Index.Empirical results reveal a significantly negative transmission coefficient of the RMB exchange rate index to China's import prices,with a marginal and statistically insignificant impact on domestic price levels.This paper identified a noteworthy attenu-ation in the transmission effect on import prices,attributed to the improvements in China's trade openness and the facilitation of RMB internationalization within the current account.Before 2018,observable regularities existed in cross-border capital flows,the foreign exchange loan-to-deposit ratio,market buy-sell exchange intentions,RMB exchange rate expectations,and market panic index alongside the Foreign Exchange Market Pressure Index.These indicators lacked regular patterns after 2018.Furthermore,the increased elasticity of the RMB exchange rate is determined not to threaten domestic price stability,fi-nancial stability,or impede domestic monetary policy,forming the basis for China's confidence in the transformation of its ex-change rate management policy measures.To fortify these outcomes,the paper recommends that the Chinese government actively promote the internationalization of the RMB,enhance monitoring mechanisms for economic and financial indicators,continue reforms in exchange rate marketiza-tion,coordinate a harmonized approach to development and security,and provide vital institutional assurances for a high-level opening-up.
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