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The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis

Author

Listed:
  • Yin-Wong Cheung

    (City University of Hong Kong)

  • Cho-Hoi Hui

    (Hong Kong Monetary Authority)

  • Andrew Tsang

    (Hong Kong Institute for Monetary Research)

Abstract

We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform. Statistical models are formulated to assess the linkages between the central parity and the alternative variants of the RMB exchange rate, market volatility and selected control variables. In a linear regression framework, we identify the roles of the onshore and offshore RMB exchange rates and the US dollar index, but not the RMB currency basket index. However, the marginal effect of the RMB index is revealed via a multiplicative interaction model that incorporates a condition variable given by the volatility of the offshore RMB market. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants, reflecting that Chinese authorities do not hesitate to adjust their policy actions under threat of high volatility.

Suggested Citation

  • Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2017. "The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis," Working Papers 062017, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:062017
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    Cited by:

    1. Frederik Kunze, 2020. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 313-333, March.
    2. Kunze, Frederik & Basse, Tobias & Wegener, Christoph & Spiwoks, Markus, 2018. "The emergence of the RMB: A "New Normal" for China's exchange rate system?," University of Göttingen Working Papers in Economics 348, University of Goettingen, Department of Economics.
    3. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," University of Göttingen Working Papers in Economics 326, University of Goettingen, Department of Economics.

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    More about this item

    Keywords

    China¡¯s Exchange Rate Policy; Currency Basket; Multiplicative Interaction Model; Onshore and Offshore RMB Rates; Volatility;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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