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| Interest Rate Cycle, Exchange Rate Arrangement and International Reserves Demand |
| ZHU Mengnan, CAO Chunyu
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| The School of Economics, Xiamen University |
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Abstract This paper studies the impact of US Dollar interest rate cycle on China's economy and the dynamic adjustment of international reserves demand for a policy set of the forex market intervention rule and Taylor rule through a New Keynes DSGE model. The study found that, facing unexpected temporary interest rate shock, the fixed exchange rate arrangement through forex market intervention can attain exchange rate target, which makes Taylor rule better positioned to stabilize financial environment and reduce output volatility in the short run, and thus is better than other alternatives; while in the long run, when facing persistent interest rate shock, the managed floating exchange rate arrangement through forex market intervention can adjust exchange rate floating range in a “leaning against the wind” style under the monetary authority's discretion with much less welfare loss in terms of real economy as well as financial volatilities compared with other alternatives, thus can be an optimal policy alternative for China during its gradual opening up of capital accounts and currency internationalization.
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Received: 08 July 2017
Published: 01 January 1900
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| About author:: Shen Chunxiu,(1979—),E-mail:shenchunxiu@126.com |
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