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Interdependence between foreign exchange rate and international reserves: Fresh evidence from China

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  • Jiang, Zhuhua
  • Yoon, Seong-Min

Abstract

This study aimed to explore the motives behind the intervention of China’s foreign exchange authorities in the foreign exchange (FX) market. The research was conducted between January 1995 and December 2020, using quantile analysis and wavelet analysis techniques. The results of the wavelet coherence revealed that between 2009 and 2011, depreciation of the nominal effective exchange rate caused an increase in reserves, supporting the mercantilist motive of maintaining export competitiveness. However, between 2015 and 2017, the results indicated that depreciation of the exchange rate were related to a decrease in foreign reserves, which suggests that the FX authorities intervened to stabilize the value of the Chinese currency. The findings also showed that as FX market reforms progressed, the function of international reserves shifted from a mercantilist motive to a precautionary motive to hedge against balance of payments instability.

Suggested Citation

  • Jiang, Zhuhua & Yoon, Seong-Min, 2024. "Interdependence between foreign exchange rate and international reserves: Fresh evidence from China," Research in International Business and Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000473
    DOI: 10.1016/j.ribaf.2024.102255
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    More about this item

    Keywords

    Foreign exchange rate; International reserves; Quantile causality; Wavelet decomposition; Wavelet coherence;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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