The effects of RMB exchange rate volatility on foreign exchange reserves
CHEN Lang-nan1, HUANG Shou-feng2
1. Lingnan College, Institute for Economics, Sun Yat-sen University, Guangzhou 510275, China; 2. Department of Public Economics, Xiamen University, Xiamen 361005, China
Abstract：By taking into account balance of payments and demand for foreign exchange reserves, this article constructs a theoretical model to analyze the effects of RMB exchange rate volatility on the fluctuation of foreign exchange reserves. And then this article also investigates the effects of the nominal effective exchange rate volatility and real effective exchange rate volatility on the foreign exchange reserve. The results of theoretical model show that the effects of scale variable, propensity to import, foreign income and exchange rate on foreign exchange reserves depend on the their effects on μ, the certain part of instant changes of foreign exchange reserves respectively. The empirical results show that, in the long run, scale variable, propensity to import, nominal effective exchange rate and real effective exchange rate have significantly positive effects on foreign exchange reserves while the effects of reserve volatility, real effective exchange rate volatility and exchange rate regime are significantly negative. The effects of foreign income, real interest rate difference between China and the US and nominal effective exchange rate volatility are not significant. In the short run, nominal effective exchange rate volatility and real effective exchange rate have significantly negative effects on the change of foreign exchange reserves, and the effect of foreign income is significantly positive while the effects of other variables are not significant.
[1] Bahmani-Oskooee M, Brooks T J. Bilateral J-Curve Between US and Her Trading Partners[M]. Weltwirtschaftliches Archiv, 1999, 135: 156-165. [2] Lal A K, Lowinger T C. National effective exchange rate and trade balance adjustment in South Asia countries[J]. Journal of Asian Economics, 2002, 13: 371-383. [3] Lane P R, Milesi-Ferretti G M. International Financial Integration[M]. IMF Staff Paper, 2003, 50: 82-113. [4] Krugman P. Exchange Rate Instability[M]. Cambridge, Mass: The MIT Press, 1989. [5] Cushman D O. Exchange rate uncertainty and foreign direct investment in the United States[J]. Weltwirtschaftliches Archiv, 1988, 124(27): 322-335. [6] Froot K, Stein J C. Exchange rates and foreign direct investment: An imperfect capital markets approach[J]. Quarterly Journal of Economics, 1991, 106: 1191-1217. [7] Goldberg L S, Klein M W. Foreign direct investment, trade and real exchange rate linkages in Southeast Asia and Latin America[R]. NBER Working Paper, 1997: 6344-6381. [8] Barrel R, Pain N. Trade restraints and Japanese direct investment flows[J]. European Economic Review, 1999, 43: 29-45. [9] Cushman D O. Real exchange rate risk, expectations, and the level of direct investment[J]. Review of Economics and Statistics, 1985, 67(2): 297-308. [10] Ma Y. Stock Markets and Foreign Direct Investment: An Extension of Tobin's q Theory[M]// Tavidze A. Progress in International Economics Research, Chapter 4, Hauppauge, NY: Nova Science Publishers, 2001. [11] Ma Y, Kanas A. Intrinsic bubbles revisited: Evidence from nonlinear cointegration and forecasting[J]. Journal of Forecasting, 2004, 23: 237-250. [12] Zhao R F. No quick action on foreign exchange reserves[N]. China Business Weekly, Beijing, No.4, January 20, 2004. [13] Kynge J. China in new bid to ease Renminbi pressure[N]. Financial Times, London, Feb 28, 2004. [14] Bahmani-Oskooee M, Malixi P. Effects of exchange rate flexibility on the demand for international reserves[J]. Economics Letters, 1987, 23: 89-93. [15] Bahmani-Oskooee M, Malixi P. Exchange rate flexility and the LDCs demand for international reserves[J]. Journal of Quantitative Economics, 1988, 4: 317-328. [16] Bahmani-Oskooee M, Niroomand F. On the exchange rate elasticity of the demand for international reserves: Some evidence from industrial countries[J]. Weltwirtschaftliches Archiv, 1988, 124(1): 161-168. [17] Frenkel J A, Jovanovic B. Optimal international reserves: A stochastic framework[J]. The Economic Journal, 1981, 91: 507-514. [18] 卢向前, 戴国强.人民币实际汇率波动对我国进出口的影响: 1994-2003[J]. 经济研究, 2005(5): 31-39.Lu X Q, Dai G Q. The influence of fluctuation of real RMB exchange rate to Chinese import and export: 1994-2003[J]. Economic Research Journal, 2005(5): 31-39. [19] 马丹, 许少强.中国贸易收支、贸易结构与人民币实际有效汇率[J].数量经济技术经济研究, 2005(6): 23-32.Ma D, Xu S Q. China's trade balance, trade structure and real effective exchange rate (REER) of RMB[J]. Quantitative & Technical Economics, 2005(6): 23-32. [20] 谢建国.外商直接投资、实际有效汇率与中国的贸易盈余[J].管理世界, 2005(9): 36-47.Xie J G. Foreign direct investment, real effective exchange rate and China's trade surplus[J]. Management World, 2005(9): 36-47. [21] 巴曙松, 朱元倩.基于可加模型的外汇储备影响因素的实证分析[J].金融研究, 2007, 11: 1-12.Ba S S, Zhu Y Q. Positive analysis of the effect factors of Chinese foreign reserves based on additive model[J]. Journal of Financial Research, 2007, 11: 1-12. [22] 易行健.人民币有效汇率波动对我国货币替代与资本外流影响的实证检验[J].世界经济研究, 2006, 12: 40-44.Yi X J. An empirical test of the influence of RMB exchange rate fluctuations on China's monetary substitution and capital outflows[J]. World Economy Study, 2006, 12: 40-44. [23] 谷宇, 高铁梅.人民币汇率波动性对中国进出口影响的分析[J].世界经济, 2007, 10: 49-57.Gu Y, Gao T M. The ananlysis of the influence of RMB exchange rate volatility on the China's import and export[J]. The Journal of World Economy, 2007, 10: 49-57. [24] 周靖祥, 刘渝琳. FDI、外汇储备与净出口贸易——我国改革开放以来的计量经济学检验[J].世界经济文汇, 2007(4): 46-63.Zhou J X, Liu Y L. FDI, foreign exchange reserves and net export trade——China's econometrics inspection since the reform and opening[J]. World Economic Papers, 2007(4): 46-63. [25] Bahmani-Oskooee M, Hegerty S W. Exchange rate volatility and trade flows: A review article[J]. Journal of Economic Studies, 2007, 34(3): 211-255. [26] 谢建国, 陈漓高.人民币汇率与贸易收支:协整研究与冲击分解[J].世界经济, 2002(9): 27-34.Xie J G, Chen L G. RMB exchange rate and trade balance: Cointegration research and impact decomposition[J]. World Economy, 2002(9): 27-34. [27] 毕玉江, 朱钟棣.人民币汇率变动的价格传递效应——基于协整与误差修正模型的实证研究[J].财经研究, 2006(7): 53-62.Bi Y J, Zhu Z D. The transfer effect of changes in RMB exchange rates: An empirical research based on the co-integration and error correction models[J]. Journal of Finance and Economics, 2006(7): 53-62. [28] 王胜, 邹恒甫.资本、汇率与福利[J].金融研究, 2007(3): 25-40.Wang S, Zou H F. Capital, exchange rate and welfare[J]. Journal of Financial Research, 2007(3): 25-40. [29] 范言慧, 潘慧峰, 李哲.人民币升值预期与我国的贸易顺差[J].国际金融研究, 2008(2): 52-59.Fan Y H, Pan H F, Li Z. RMB appreciation expectations and China's trade surplus[J]. Studies of International Finance, 2008(2): 52-59. [30] 沈国兵.美中贸易收支与人民币汇率关系: 实证分析[J].当代财经, 2005(1): 43-47.Shen G B. The US-China trade balance and RMB's exchange rate: An empirical analysis[J]. Contemporary Finance & Economics, 2005(1): 43-47. [31] Ford J L, Huang G B. The demand for international reserves in China: An ECM model with domestic monetary disequilibrium[J]. Economica, 1994, 67: 379-397. [32] Huang G B. Modelling China's demand for international reservers[J]. Applied Financial Economics, 1995(5): 357-366. [33] 金中夏.中国汇率、利率和国际收支的互动关系1981-1999[J].世界经济, 2000(9): 19-24.Jin Z X. The interacting relationship of China's exchange rate, interest rate and the international balance of payment[J]. World Economy, 2000(9): 19-24. [34] Jin Z. The dynamics of real interest rates, real exchange rates and the balance of payments in China: 1980-2002[R]. IMF Working Paper 67, 2003. [35] Narayan P K, Smyth R. The relationship between the real exchange rate and balance of payments: Empirical evidence for China from cointegration and causality testing[J]. Applied Economics Letters, 2004(11): 287-291. [36] Nararan P K, Smyth R. The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves: Empirical evidence from China[J]. Applied Financial Economics, 2006, 16(9): 639-651. [37] 易行健.人民币实际有效汇率波动对外汇储备影响的实证研究: 1996-2004[J].数量经济技术经济研究, 2007(2): 3-10.Yi X J. A positive study on the effect of RMB real effective exchange rate on the international reserve: 1996-2004[J]. The Journal of Quantitative & Technical Economics, 2007(2): 3-10. [38] Reinhart C M, Rogoff K S. The modern history of exchange rate arrangements: A reinterpretation[J]. Quarterly Journal of Economics, 2004, 119(1): 1-48. [39] Bandinger H. Austria's demand for international reserves and mone tary disequlibrium: The case of a small open economy with a fixed exchange rate regime[J]. Economica, 2004, 71(1): 39-55. [40] Aizenman J, Lee J. International reserves: Precautionary versus mercantilist views, theory and evidence[J]. Open Economies Review, 2007, 18(2): 191-214. [41] Aizenman J, Riera-Crichton D. Real exchange rate and international reserves in an era of growing financial and trade integration[R]. NBER Working Paper 12363, 2006. [42] Ramachandran M. The optimal level of international reserves: Evidence for India[J]. Economics Letters, 2004, 83: 365-370. [43] Ramachandran M. Asymmetric exchange rate intervention and international reserve accumulation in India[J]. Economics Letters, 2007, 94: 259-265. [44] Ra H R. Demand for international reserves: A case study of Korea[J]. Journal of the Korean Economy, 2007, 8(1): 147-175. [45] Dunn R M, Mutti J H. International Economics[M]. 5th ed. London: Routledge, 2000. [46] McCauley R N. Capital flows to East Asia since 1997 crisis[J]. BIS Quarterly Review, 2003: 41-56. [47] Taniuchi M. Global imbalances and Asian economies[R]. JBICI Review No.14, Japan Bank for International Cooperation Institute, 2006. [48] 李扬.中国经济对外开放过程中的资金流动[J].经济研究, 1998(2): 14-24.Li Y. The cash flow in the process of China's economy opening[J]. Economic Research Journal, 1998(2): 14-24. [49] 汪洋.中国的资本流动: 1982-2002[J].管理世界, 2004(7): 43-52.Wang Y. China's capital flow between 1982 and 2002[J]. Management World, 2004(7): 43-52. [50] Prasad E, Wei S. The Chinese approach to capital inflows: Patterns and possible explanations[R]. NBER Working Paper No. 11306, 2005. [51] 陈学彬, 余辰俊, 孙婧芳.中国国际资本流入的影响因素实证分析[J].国际金融研究, 2007(12): 53-60.Chen X B, Yu C J, Sun J F. An empirical analysis on the key drivers of international capital inflows into China[J]. Studies of International Finance, 2007(12): 53-60. [52] Vincent B. Hot money inflows and monetary stability in China: How the people's bank of China took up the challenge[J]. TEAM Working Papers No. Bla06010, 2007. [53] 冯彩.我国短期国际资本流动的影响因素——基于1994-2007年的实证研究[J].财经科学, 2008(6): 32-39.Feng C. The factors influencing short-term international capital flow in China——An empirical study based on the data of 1994-2007[J]. Finance & Economics, 2008(6): 32-39. [54] Flood R, Marion N. Holding international reserves in an era of high capital mobility[R]. IMF Working Paper No.62, 2002. [55] Engle R E, Granger C W J. Cointegration and error correction: Representation, estimation, and testing[J]. Econometrica, 1987, 55(2): 251-276. [56] Johansen S, Juselius K. Maximum likelihood estimation and inference on cointegration with application to the demand for money[J]. Oxford Bulletin of Economics and Statistics, 1990: 169-210. [57] Pesaran M H, Shin Y, Smith R J. Testing for the existence of a long-run relationship[R]. DAE Working Paper No. 9622, Department of Applied Economics, University of Cambridge, 1996. [58] Pesaran M H, Shin Y, Smith R J. Bounds testing approaches to the analysis of long run relationships[D]. University of Cambridge, 2001. [59] Pesaran M H, Shin Y. An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis[M]// Strom S, Diamond P. Centennial Volume of Ragnar Frisch, Cambridge University Press, 1998. [60] Goldstein M, Lardy N. China's role in the revived bretton woods system: A case of mistaken identity[R]. Institute for International Economics Working Paper No. WP05-2, 2005.
2012, Vol. 32 
