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Weights and Empirical Analysis of RMB Exchange Rate Adjustments with Reference to a Basket of Currencies Following the Exchange Rate System Reform of 2010

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  • Qianjin Lu

    (Department of International Finance, Fudan University, Shanghai 200433, China)

Abstract

This paper constructs an RMB/USD exchange rate index and a basket currency exchange rate index. The correlation maximization of the RMB/USD and the basket currency index may determine the weight and quantity of the basket currency. The currency basket indicates that the weight of the USD is highest, whereas that of the GB Pound is the lowest. Our currency basket has a high linear dependence on that of the central bank. We found that the RMB/USD and currency basket indices have a long-term co-integration relationship according to the optimal currency weights. The results of the error-correcting model manifest as the RMB/USD exchange rate deviates from the long-term equilibrium level, wherein 76.3% will be corrected. This paper checks the prediction capacity, which indicates the good fit of the model. By using the Granger causality test the findings show that the People¡¯s Bank of China adjusts the RMB/USD exchange rate with reference to the currency basket.

Suggested Citation

  • Qianjin Lu, 2014. "Weights and Empirical Analysis of RMB Exchange Rate Adjustments with Reference to a Basket of Currencies Following the Exchange Rate System Reform of 2010," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 9(2), pages 285-308, June.
    • Handle: RePEc:fec:journl:v:9:y:2014:i:2:p:285-308
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-003-014-0015-2
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    More about this item

    Keywords

    currency basket; new exchange rate system reform; currency weight and quantity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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