Influence of Hong Kong RMB offshore market on effectiveness of structural monetary policy in the Mainland China

Weiguang Qin and Keshab Bhattarai

MPRA Paper from University Library of Munich, Germany

Abstract: We find that the monetary policy in the mainland China will underestimate the volatility of major macro variables when it fails to consider the influence of capital flows to and from the Hong Kong RMB offshore market. Analyses of SVAR model reveals that the Hong Kong RMB offshore market affects money market in the mainland China through changes in the financial flows and exchange rates. In the early stage of the implementation of structural monetary policy (SMP) for macroeconomic stability, the cross-border flows of capital occurs due to changes in arbitrage behavior from the Hong Kong RMB offshore market, which affects not only money supply but also expectations of households and firms about actual interest rate and exchange rates that often produce opposite of intended effects in the price and output. Scenario one of SVAR simulations, that ignored the Hong Kong RMB offshore market came with lower volatilities of the target macro variables but the model generated values of variables did not match well to the actual data. Scenario two of the simulation of the same SVAR model including the Hong Kong RMB offshore market, had model values of model variables closely matching to the actual data though with slightly higher volatilities of those variables.

Keywords: RMB offshore market; monetary policy; macroeconomic volatility; exchange rate (search for similar items in EconPapers)
JEL-codes: E58 E61 O38 (search for similar items in EconPapers)
Date: 2022-01-30, Revised 2022-01-30
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac and nep-mon
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