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U.S. monetary policy uncertainty and RMB deviations from covered interest parity

Zhitao Lin and Xingwang Qian ()
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Zhitao Lin: Jinan University

No GRU_2020_029, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: This paper examines how U.S. monetary policy uncertainty (MPU) affects RMB deviations from covered interest parity (CIP) and how this effect is influenced by China’s capital controls, the RMB exchange rate regime, and international reserves that constrain the transmitting channel of U.S. MPU shocks. Our findings show that U.S. MPU has a spillover effect and creates deviations from RMB CIP. Capital controls insulate uncertainty shocks and alleviate the U.S. MPU spillover effect. There are some evidences that international reserves alleviate and the liberalized RMB exchange rate regime magnifies the spillover effect. However, their effects become insignificant in the presence of capital controls. Moreover, the U.S. MPU effect on RMB CIP deviation became prominent after the 2008 global financial crisis.

Keywords: U.S. MPU; deviation from CIP; RMB cross-currency basis; capital controls; exchange rate regime; international reserves (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-12-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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