Monetary Policy and Exchange Rate Fluctuations

Yongheng Hu

Papers from arXiv.org

Abstract: In this paper, we model USD-CNY bilateral exchange rate fluctuations as a general stochastic process and incorporate monetary policy shock to study how exchange rate fluctuations affect the Revealed Comparative Advantage (RCA) index of export. Numerical simulation and empirical analysis demonstrate that a minor depreciation of the currency can enhance export competitiveness. Monetary policy and innovation both show positive effects on export, while the monetary policy stabilizes exchange rate fluctuations to comprehensively boost provincial export competitiveness, the innovation reduces reliance on exchange rate mechanisms to enhance export competitiveness. We further construct a model of heterogeneous trade structures to explore optimal policy according to exchange rate fluctuations. We find that optimal policy should promote dynamic transitions in trade structures rather than maintain existing comparative advantages. Particularly in balanced trade structures, exporting firms have more space for wealth growth and face weaker inequality pressures of wealth distribution.

Date: 2025-09, Revised 2025-12
New Economics Papers: this item is included in nep-cba, nep-mon, nep-opm and nep-sea
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