Asymmetric Channel Effects of Exchange Rate Fluctuation on Changes in China’s International Reserves: Based on a Non-linear Smooth Transition AutoregressiveGeneralized Conditional Heteroscedasticity Mode
Abstract:
Considering major variables such as real effective exchange rate (REER), real international interest rate spread and outward FDI, we build a theoretical model, employing smooth-transition GARCH model to study the direct and indirect REER-channel influence on forex. As we conclude, among these factors, REER is obviously non-linear and asymmetric; forex may be affected directly by explanatory variables, or be influenced by them through indirect channel. In addition, high REER expectation can reinforce speculating motivation, which attracts FDI and raises rate of forex increase; while an ineffective international interest rate spread – as tool for monetary policy and “floodgate” for speculative capital – increases forex, and vice versa.
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