Reference currency basket the yuan Empirical Analysis

[Abstract] By applying the Kalman filter since July of 2005 China's new round of reform on the empirical analysis to assess the composition of the RMB and the reference currency basket weight of the dynamic adjustment process study: the exchange rate of RMB exchange rate system reform to enhance the flexibility of the RMB currency basket has been in the composition and weights of the dynamic adjustment process, and is a gradual, steady, cyclical adjustment process, the financial crisis on the adjustment of the RMB currency basket had a negative impact.

[Keywords] RMB exchange rate, currency basket, Kalman filtering

I. Introduction

Since July 21, 2005, the country has changed a single fixed exchange rate system pegged to the dollar, the introduction of market supply and demand with reference to a basket of currencies, managed floating exchange rate system shown in Figure 1, since Since the reform of RMB exchange rate system showed unilateral appreciation trend against the U.S. dollar, has appreciated 21.4% from Figure 1 can also be seen along with the RMB exchange rate reform continued to deepen, the RMB exchange rate against the euro and the RMB exchange rate volatility against the yen have gradually expand. RMB exchange rate reform has seen the orderly conduct, and the flexibility of the exchange rate regime has indeed been largely improved.

August 10, 2005, Bank of China announced that the RMB mainly by reference to a basket of currencies in China's foreign trade, direct investment, external debt and other important aspects of the foreign currency composition. Basket of currencies to determine the weight of foreign trade is mainly , the United States, the euro zone, Japan, South Korea is China's most important trading partner, accordingly, the U.S. dollar, euro, Japanese yen, Korean won will naturally become a major currency basket. In addition, Singapore, UK, Malaysia, Russia, Australia, Thailand, Canada and other countries with a larger proportion of China's trade, and their currencies against the RMB exchange rate is also very important, but the monetary authorities have not explicitly included in the basket of currencies in the currency types and weights, and how with the domestic and international economic environment changes and adjustments to the currency basket while the gradual reform of RMB exchange rate system, a crucial stage of the financial crisis is an impact of the reform process is also worthy of study. As China's economy continues to develop, eager domestic role of monetary policy can have a lot of flexibility, but also hope to use the exchange rate policy response is relatively independent of internal and external imbalances, and ultimately achieve sustainable economic growth under the conditions of internal and external balance target.

This paper analyzes the before and after the reform of RMB exchange rate regime change in exchange rate volatility, and then analyze the use of Kalman filter since the reform of RMB exchange rate system in the currency composition of the currency basket and the weights of the dynamic adjustment process, and analyze how the financial crisis have on the exchange rate system reform impact.


Second, the RMB theoretical analysis with reference to a basket of currencies

(A model of a basket of currencies
Using Frankel and Wei (2007 model in the basket of currencies weighted basket of currencies to estimate, assuming the reference currency basket the yuan equation:
(B) exchange data on
As the basket of currencies to determine the weight of foreign trade is based, the United States, the euro area, Japan, South Korea is China's main trading partners, four countries (regions and China's foreign trade of China's total foreign trade of more than 50% . Frankel and Wei (2007) model of the RMB currency basket of the regression analysis found that only the dollar, euro, yen and won the statistical significance of regression coefficients is significant, therefore, we assume only a basket of currencies including the dollar, euro, Japanese Yuan and won the four currencies. on the choice of base currency, Frankel and Wei (2007 RMB using that as a basket of currencies of a managed floating exchange rate regime, monetary authorities in deciding whether to intervene on the exchange rate of RMB is more likely to be considered for Special Drawing Rights or other trade-weighted exchange rate deviation, so this choice of Special Drawing Rights (SDR as the base currency for empirical analysis.

This data from the International Monetary Fund, including: RMB, U.S. dollars, euro, yen and Korean won in the January 1, 2005 to March 2010 10 period as the base currency of the SDR on the exchange rate data. Those who lack the dates quoted in RMB have been removed, other currencies, if any vacancies have been removed, and ultimately get 1 087 daily data.


Third, the RMB currency basket of the empirical analysis model

(A before and after the reform of RMB exchange rate system, exchange rate fluctuations characteristic
Using (3-type of the RMB exchange rate on the natural logarithm of the first-order differential.

Software using E-views of the basket of currencies against the RMB model Kalman filter analysis of Figure 2 is a basket of currencies by smoothing regression coefficient curve from Figure 2 can be seen: the minimum coefficient of 0.831 U.S. dollar, the euro factor from July 2005 On the level slowly rose to 0.027 in December 2007 of 0.064, then drop quickly to the December 2008 level of 0.007, and then remained stable at 0.006-0.001, the yen coefficient between 2005 and August 2008 and down fluctuations in the 0.05 , November 2008, after the slight fluctuations around 0, won factor in July 2005 to August 2006 has been in a period of 0.005, from September 2006 to March 2008 rising by the 0.0022 to 0.041,2008 April to November 2008, falling from 0.041 to 0.003,2008 has maintained since December 0.003 level. Links to free download http://www.hi138.com
By Kalman filter analysis can be drawn: the monetary authorities have been adjusting the currency basket weights of various currencies, currency weight adjustment is a dynamic iterative process. This adjustment to the prevailing international and domestic economic situation around, is a discretionary adjustment process can be adjusted to the whole process is divided into four stages: the first stage is from July 2005 to February 2006 for the reform to test the water phase, features include changing the monetary system pegged to the dollar, the RMB exchange rate fluctuations variable increases, the monetary authorities in the currency of the currency basket weights to fine-tune the second stage is from March 2006 to August 2007, for the advanced stage of the reform, features include the appreciation of the RMB against the U.S. dollar, the RMB exchange rate against other currencies fluctuations further expand the scope, currency basket of the dollar weight of the declining euro and the yen in the currency basket weights have more marked increase, in which the euro right material in the yen's weight, won in the currency basket weights are not obviously, the third stage is from September 2007 to November 2008, for the contraction phase of the reform, features include a further appreciation of RMB against the U.S. dollar, the RMB exchange rate fluctuations, but the currency basket weight of the rising dollar, euro and yen in the currency basket weights continue to decline, the fourth stage is the December 2008 to the end of 2009, as the stable phase of the reform, features include the RMB against the U.S. dollar exchange rate remained at 6.85-6.82 level, exchange rate volatility has decreased slightly , while the dollar currency basket weight of up to 1 level, compared to other currencies, the weight 0. Further, the currency basket of the adjustment phase consists of five stable phase (from April 2006 to May 2006, (September 2006 to December 2006, (August 2007 to December 2007, (April 2008 to May 2008, (February 2009 to March 2010, and five progressive stages (July 2005 to 2006 March 2001), (June 2006 to August 2006, (January 2007 to July 2007, (January 2008 to March 2008, (June 2008-January 2009.

(Three yuan currency basket of the dynamic adjustment mechanism analysis
The above analysis focuses on the progressive phase, followed by the use of E-views software for the reform were stable before and five stages of the currency basket model regression analysis results shown in Table 2.

The results of regression analysis can be found in the process of adjustment of China's exchange rate system is: 1 U.S. dollar before the reform of the regression coefficient close to 1, that our policy is pegged to the dollar's fixed exchange rate system .2.2005 July to March 2006 is China's exchange rate system reform, the preparation phase, the yuan pegged to the dollar's exchange rate system gradually loosened, and this loosening in the statistical sense is significant .3.2006 April to May 2006 as a stable currency basket of the first stage, the dollar regression coefficient down to 0.96 level, the level of the yen coefficient increased to 0.05, and statistically significant coefficient on the yen is significant, indicating that the RMB exchange rate regime pegged to the dollar from a single reference to an orderly transition to a currency basket and the basket of currencies at least including the U.S. Dollar, Japanese Yen .4.2007 from August to December 2007, the third stable phase for the basket of currencies, the dollar fell to record low weight, the currency basket weight of the euro and the yen reached the maximum, but this time the sub-prime crisis intensified, to a certain extent, affected the pace of adjustment .5.2008 currency basket since March as the sub-prime crisis to further expand into a global financial crisis, the adjustment of China's exchange rate system bottleneck, the euro and the yen, the currency basket weights began to shrink in 2009 and recovered the initial level of exchange rate system reform. Links to free download http://www.hi138.com