This study evaluates how relevant Chinese monetary policy announcements are to Chinese financial markets and the real side of the economy. Chinese monetary policy is identified by estimating a “target” factor measuring policy surprises and a “path” factor measuring future expectations of policy using price changes to Chinese financial derivatives on policy announcement dates. Local projection results show that 1) Chinese Treasury yields and interbank rates respond persistently; 2) Equities and forex markets do not respond to policy announcements instantaneously, but with a lag; 3) Future expectations of Chinese monetary policy play a larger role than surprises, and 4) Real variables show evidence of policy transmission.

This paper evaluates the effect of Chinese monetary policy shocks on credit creation
through the shadow banking sector in mainland China. I identify monetary policy shocks
by constructing a measure of monetary policy surprises based on changes to the 1-Year
Interest Rate Swaps on the 7-Day Repo Rate on monetary policy announcement dates. A
two-stage local projection was then estimated, using the surprise measure as an instrument.
The results give two key findings: 1) shadow credit expands in response to contractionary
monetary policy, and 2) I provide additional evidence of the transmission of monetary
policy through the interest rate channel.

We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM is identified to affect firm investment positively. The effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared to unconstrained ones, are less responsive to active IRM. Third, we quantify the causal effect of IRM on firm investment and find that 30% of it is mediated through the country spread channel. Fourth, capital controls and exchange rate management complement the IRM. It is beneficial to form a macro-management mix that includes active IRM to safeguard firm investment against global financial shocks. Further, our analysis on the country-level data affirms a significant Granger causal effect of the IRM on investment at the macroeconomic level.

Using quarterly data on four commodity exporting countries, we study the explanatory power of real commodity prices for predicting real effective exchange rates, with special attention to the separate roles of different sectoral commodity prices during alternative time periods. We find that the commodity price effect is non-uniform across countries and commodity sectors, and moreover varies over time. The use of fixed weight price indexes, or nominal exchange rates and commodity prices, also yields heterogeneous commodity price effects. Further, the pattern of commodity price effects is influenced by the presence of macroeconomic conditions, the effects of crises, and the exchange rates of top trading partners. These empirical results highlight the challenges of explaining a wide range of currency behaviors across different time periods with a single commodity-price-based exchange rate model. These findings also complicate the tasks facing policymakers who assume stable commodity price effects.

Using a dataset of 3108 dichotomous renminbi (RMB) misalignment estimates from 95 studies, we conduct a meta-analysis based on Bayesian model averaging (BMA) to assess the effects of study characteristics on these RMB misalignment estimates. The findings demonstrate that selected study characteristic types systematically influence RMB misalignment estimates (e.g., time series Vs non-time series approach). Though lean towards RMB undervaluation inference, results from the BMA meta-analysis and the corresponding median probability model and synthetic practice evaluation do not offer a conclusive statistical inference on RMB misalignment. Specifically, the evidence varies with the configuration of model specification and does not corroborate the RMB undervaluation claim for the periods of “2009–2010” and “2011–2014.”

We employ the input-output framework and recent global value chain (GVC) results to construct the index of foreign financial services adoption in manufacturing (FFSAM) that captures the role of foreign financial services in facilitating domestic manufacturing production. The FFSAM index shows that foreign financial services adoption by Asian economies has rapidly caught up with the Western world between 2007 to 2017. Asian economies tend to deploy more foreign financial services from high-income economies than low-income economies, and in high-technology manufacturing industries than low-technology manufacturing industries. Manufacturing industries that produce for domestic consumption and for exports tend to attract different groups of financial servicification providers. It is found that the FFSAM index is affected by the GVC position, financial institution factors, and financial market characteristics.

Based on the β-estimate that captures the interest rate differential effect in uncovered interest rate parity (UIP) regressions, we show that an empirical model that includes proxy variables for unobservable factors and allows for variables to have time-varying weights and parameters can reduce the UIP deviation. However, the specification that alleviated UIP failure does not reduce the variability of the β-estimate. The explanatory variables exhibit time-varying coefficient estimates and shifting importance across exchange rates. These findings corroborate the scapegoat theory and suggest that the difficulty of rectifying the empirical UIP failure can be attributable to the shifting roles of explanatory variables and time-varying parameter effects.

This study discusses the global role of the RMB. After recapitulating its economic and trade growth experiences, we recount China’s evolving exchange rate policy in the post-reform era, review the debate over whether the RMB is overvalued or undervalued, present China’s policies to globalize the RMB, describe offshore RMB trading, assess the current global status of the RMB, and discuss geopolitical tensions in the last few years. Since 2009, the process of globalizing RMB has not been smooth sailing and progressed quite unevenly over time. Despite the strong performance in the early 2010s, the RMB is under-represented in the global market and its global role does not match China’s economic might. The path of RMB internationalization is affected by both China’s economic performance and geopolitical factors.

This chapter discusses the structure and functioning of the spot foreign exchange (FX) market. The market structure, which has become far more complex over the past three decades, has mostly evolved endogenously as the global FX market is subject to notably less regulatory oversight than equity and bond markets in most countries. Major banks used to dominate liquidity provision but they have found their role challenged by High Frequency Trading firms in an increasingly fragmented electronic market. The information structure of the market has also changed. As such, high-frequency cross-asset correlations, especially with the futures market, have become more important. The chapter also discusses the important role of the official sector in the FX market, and it highlights a few special topics such as flash events and the FX fixing scandal. We conclude with some suggestions for future research.