On the currency appreciation caused by the currency crisis mechanism

Summary: Under the pressure of currency appreciation, in order to maintain a fixed exchange rate, bought a large amount of foreign currency of a country, sources of base money increased the proportion of foreign exchange, until the money supply by foreign exchange control, the country's fixed exchange rate regime in favor of floating, the sharp appreciation of the currency short-term drag on Economic growth, profit-driven international hot money leave the economy bubble burst, damaging the country's Economic development, China should strengthen capital controls, deepen financial management, and promoting the yuan to float freely.

Keywords: appreciation of the currency exchange rate currency crisis

According to IMF <<World Economic Outlook (1998>> in the 53 countries studied experienced 158 currency crises, of which 42 developed countries, developing countries 116 times in recent years, frequent occurrence of currency crises, and destruction of infectious force is also increasing.

First, the currency appreciation caused by the currency crisis mechanism
According to the monetarist analysis of the balance of payments and build the currency appreciation of the currency crisis caused by the analytical framework.

(A) the basic assumptions
1.A State a fixed exchange rate system.

2 in country A does not assume the case of capital liberalization, foreign capital is still available from various sources (including false trading, false channel foreign investment into the country A is not legitimate market-seeking international capital markets on a country's foreign exchange supply and demand impact is much greater than the impact of changes in import and export.

(B) the basic equation
1.MD = P · L (Y, i)
MD on behalf of domestic monetary aggregate demand, the domestic price level P and total income Y and a function of the interest rate i, Md and P and Y are related, associated with anti-i.

2.MS = k (D + R)
MS on behalf of the total money supply, monetary base is the domestic credit D (including government and commercial bank credit credit DG DB, the international reserve currency multiplier R and K functions.

3.MS = MD
Money market supply and demand balance.

4.FS = X + CIF (ΔEe, i)
FS ghostwriter supply of foreign exchange from exports and capital inflows CIF X composition. CIF is the expected change in exchange rates and interest rates i ΔEe a function of inverse correlation with ΔEe, and i are related.

5.FD = M + COF (ΔEe, i)
FD on behalf of foreign exchange demand, imports of M and capital outflows from the COF composition. COF and ΔEe positively correlated with anti-i-related.

6.E = f (FS, FD
E is the direct quotation under the nominal exchange rate, foreign exchange demand and supply of foreign exchange is a function of inverse correlation with the demand for foreign exchange, and foreign demand are related.

7.ΔR = FS - FD
ΔR changes on behalf of the international reserves, the monetary authorities to maintain a fixed exchange rate, international reserves to be spent in the open market sale of foreign exchange, to achieve the regulation of foreign exchange supply and demand imbalance.

(C) the mechanism
A the existence of currency appreciation is expected, ΔEe is negative, the international capital into the country A through various channels, leading to FS increases, there is upward pressure on the currency. A state authorities to maintain a fixed exchange rate of E, to sell bonds to buy foreign exchange, ΔR is positive , R increases, MS increased, and direct response to the rise in the price level P.

To stabilize the price level and prevent inflation continued, A country to tighten monetary policy, raising interest rates i and use window guidance policy to reduce the DB. With the decline in MS, MD down, P down, A country's foreign exchange market and the domestic money market re- back to the initial equilibrium.

A contraction of credit by the authorities to achieve a fixed exchange rate and price stability objectives, results-based to reduce the currency composition of D, R increases. R increases, the international capital of country A currency appreciation is expected to strengthen, i improved to increase the international fame and fortune A country's currency capital to attract the international capital flows will continue to increase, A country will fall into the cycle, until the DG exhaust, DB shrinkage to a minimum, the monetary authorities to maintain a stable exchange rate loss of monetary policy means of regulation, eventually give up fixed exchange rate system to the floating exchange rate, monetary crisis, which began: A currency appreciation pressure has been released, short-term rates will rise substantially, and even exchange rate overshooting, great impact on the economy.

Second, to prevent the currency crisis Suggestions
(A) to strengthen capital controls
The primary task of preventing a currency crisis is to control capital inflows and encourage capital outflows.

Specific measures to control capital inflows are the following: to strengthen the authenticity of the business review of international trade, export punished severely hoaxes, direct capital investment projects to strengthen international supervision, to guard against foreign direct investment into indirect investment, strict control of corporate and financial agencies of foreign debts, especially to control and reduce short-term debt, establish a sound management policy for QFII investment, effective regulation of foreign indirect investment capital.

Strict controls on capital inflows, while by encouraging capital outflows way, slowing currency appreciation pressure. Should be gradually relaxed corporate foreign direct investment restrictions, to encourage enterprises to carry out robust foreign investment, to further improve the QDII system to encourage financial institutions to innovate in the control of development under the premise of the risk diversification of foreign currency financial products, to gradually open up the insurance companies, pension funds, foreign investment restrictions to encourage the diversification of its global investment, further liberalization of foreign investment restrictions on individual residents, and gradually relax the purchase exchange amount, allowing individuals to invest in foreign stocks, bonds and financial derivatives.

(B) the deepening of financial regulation
From historical experience, the devaluation of the currency crisis is often intertwined with the banking crisis, the fragility of the financial system will enlarge the currency crisis devastating impact on the economy and therefore increase the stability of the financial system is necessary to prevent the currency crisis measures It should be to strengthen financial institutions, risk awareness, strengthen the credit risk assessment, and strictly control the flow of loan funds, and strictly control loans to the real estate industry, establish a specialized early warning and response mechanisms in the management of mortgage loans strengthen the monitoring of capital flows on loans to prevent loan funds into the stock market and other high-risk capital market. Links to free download http://www.hi138.com
(Three for free floating exchange rate
To fundamentally solve the problem, we need to improve the RMB exchange rate formation mechanism of RMB exchange rate determined by market forces and eventually a variety of factors that can affect the exchange rate fluctuations through the exchange rate daily absorbed by the market, or to eliminate the sharp appreciation of the renminbi devaluation expected to avoid currency crisis devastating impact on the economy.


References:
[1] Liu Hui good. International Finance, China Financial Publishing House. 2007; 4
[2] Lang Xiaolong. Currency crisis and capital controls, China Economic Publishing House. 2007; 11
[3] Jin Hongfei. Mechanism of currency crises in emerging markets, Shanghai Finance University Press, 2004; 12 Links to free download http://www.hi138.com