Exchange Rate Counter Cyclical Adjustment and Financial Stability under Two-Pillar Regulation Framework
This paper examines domestic financial stability performance of the policy combination of counter cyclical exchange rate fac-tor under managed floating and other macro prudential policies under foreign interest rate hikes bring capital outflow shock through a dynamic stochastic model.The study found that exchange rate stability effect of the counter cyclical factor of global monetary policy is better than other alternatives.Managed floating together with a counter cyclical exchange rate factor can achieve the goal of domestic financial stability more effectively.Further,when the central bank implements the counter cyclical reserve require-ment,managed floating with a counter cyclical factor can suppress the procyclical behavior of excessive depreciation,smooth the exchange rate path,and create a moderately stable financial environment.When the central bank implements the counter-cyclical reserve requirement and managed floating with a counter-cyclical exchange rate factor,counter cyclical adjustment of the central bank refinancing rate to commercial banks could smooth the domestic debt fluctuations.Managed floating together with a counter cyclical exchange rate factor can reduce social welfare losses.Therefore,monetary authorities should establish a dynamic counter-cyclical adjustment mechanism for exchange rates,focusing on its coordination with macroeconomic policies such as exchange rate fluctuation management,reserve policy and refinancing interest rates.
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