Study on the Spillover Effect of Fed Monetary Policy on RMB Exchange Rate

Abstract

In this paper, the VAR model is constructed by using the US narrow measure of money M1, the exchange rate of RMB against dollar and GDP growth gap between China and the United States to conduct empirical analysis. The results show that the implementation of the Fed’s monetary policy will have an impact on the exchange rate of RMB against the dollar in the short term, but the impact will be weakened in the long term.What really helps the RMB appreciates against the dollar is the widening gap between two countries economic growth. Conversely, the dollar reflux, the depreciation of RMB against the dollar can promote the rapid development of China’s economy in the short term, but this exchange rate advantage will disappear with the passage of time in the long run. In addition, the loose monetary policy will stimulate the U.S. economy improving, but suppress the development of China’s economy. As a result, the GDP growth gap between China and the United States has narrowed.

Keywords: Federal Reserve monetary policy; RMB exchange rate; Spillover effect; The VAR model


Article Review Status: Published

Pages: 46-60 (Download PDF)

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