Studies on the Change Mechanism of RMB Exchange Rate with Non-Recurrent Events

Abstract

The objectives of this paper are to explore the relationship between the macroeconomic indicators and exchange rate interval, as well as to probe how the government intervention or hot money inflow causes the exchange rate to jump. According to the literature, the RMB exchange rate is affected by the active management of government and the external environment. Therefore, this paper introduces a mathematical model combined with tendency approach and real options with jumping fluctuation to obtain the appropriate RMB exchange rate interval. Firstly, this paper selected the major macroeconomic variables influencing RMB exchange rate by Pearson correlation analysis and tendency approach to observe the relationship between the macroeconomic variables and exchange rate in normal economic condition. In addition, through real options approach we can understand how the central bank intervenes the exchange rate refer to the potential value of decision-making which makes the exchange rate change jumpily. In the process of empirical test, I choose the RMB exchange rate against U.S. dollar as the dependent variable for the reason of the complex interaction between these two economies. Regardless of data insufficiency, the research results in this model in some way demonstrate a proper RMB exchange rate interval which can act as a reference for government authorities making decisions about implementation of economic policies and other thinking of the relationship between economic policies and exchange rate in the future.