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The effectiveness of the monetary policy in China: New evidence from long-range cross-correlation analysis and the components of multifractality

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  • Qin, Jing
  • Ge, Jintian
  • Lu, Xinsheng

Abstract

This study examines the long-range cross-correlations between the Chinese Renminbi (RMB) exchange rate and the Shanghai Interbank Offered Rate (Shibor) markets both on qualitative and quantitative basis, using a comprehensive dataset covering the period from October 8, 2006 to September 30, 2016. Our empirical results suggest that a nonlinear time-varying correlation exists between the markets. We also verify that the third stage of China’s monetary policy reform from 2011 to 2016 had a greater influence on both small and large foreign exchange (FX) market fluctuations. Using the multifractality analysis, we conclude that China’s monetary policy can significantly reduce the multifractality of cross-correlations between the RMB exchange rate and Shibor rate markets, and that market efficiency in the third stage of policy reform is improved. Furthermore, the source of multifractality of cross-correlations is found mostly in the nonlinear correlation and fat-tailed probability distribution (PDF) components.

Suggested Citation

  • Qin, Jing & Ge, Jintian & Lu, Xinsheng, 2018. "The effectiveness of the monetary policy in China: New evidence from long-range cross-correlation analysis and the components of multifractality," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 1026-1037.
    • Handle: RePEc:eee:phsmap:v:506:y:2018:i:c:p:1026-1037
    DOI: 10.1016/j.physa.2018.04.068
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