A political cause of RMB exchange rate volatility:research based on the spillover effects of US political cycles

ZHU Mengnan1 ZHAO Qian1 WANG Yuguang1

(1.School of Economics, Xiamen University)

【Abstract】RMB exchange rate volatility is affected by not only economic factors but also political factors at home and aboard. This study firstly analyzes the transmission of the effects of political cycles to RMB exchange rate, and then builds a model for the spillover effects of political cycles. After empirical analysis, we get the following findings. (1) US political cycles have direct effects on RMB exchange rate in the short run, and such effects are mainly transmitted via regulation and capital flow. (2) The RMB appreciation rate changes periodically in accordance with US presidential election and mid-term election. It significantly decreases in the first year after a new US president takes office, but significantly rises in the first year after the mid-term election. (3) Though the effects of US political cycles are not affected by the change of the party in power, they are greatly affected by the unity of the US President and Congress, namely that whether the two branches are controlled by the same party. This study not only extends the research on the influencing factors of RMB exchange rate to the political field, but also builds a new model to analysis the impact of political factors on RMB exchange rate volatility, thus providing a new line of thinking for fully understanding the external environment of the RMB exchange rate reform.

【Keywords】 Political cycles; spillover effects; RMB exchange rate;

【DOI】

【Funds】 “Research on Strategic Issues on Scientific Management and Utilization of China’s Foreign Exchange Reserves” of Major Project for Social Science Research of Ministry of Education ( 12JZD027) “Research on Global Risk Management of China’s Foreign Exchange Reserves from the Perspective of Dynamic Optimization” of Natural Science Foundation of China (71473208) Basic Innovation Scientific Research Foundation of Xiamen University (Graduate Program) (201422G009)

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(Translated by ZHONG Yehong)

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This Article

ISSN:1002-5502

CN: 11-1235/F

Vol , No. 04, Pages 38-51

April 2015

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Article Outline

Abstract

  • 1 Introduction
  • 2 Literature review
  • 3 Theoretical analysis
  • 4 Design of empirical research
  • 5 Analysis of empirical results
  • 6 Conclusion and implications
  • References