U.S. Monetary Policy Uncertainty and RMB Deviations From Covered Interest Parity

34 Pages Posted: 4 Nov 2020

See all articles by Zhitao Lin

Zhitao Lin

Jinan University - College of Economics and Institute of Finance

Xingwang Qian

State University of New York, Buffalo State

Date Written: September 14, 2020

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

JEL Classification: E43, F31, G15

Suggested Citation

Lin, Zhitao and Qian, Xingwang, U.S. Monetary Policy Uncertainty and RMB Deviations From Covered Interest Parity (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3692394 or http://dx.doi.org/10.2139/ssrn.3692394

Zhitao Lin (Contact Author)

Jinan University - College of Economics and Institute of Finance ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

Xingwang Qian

State University of New York, Buffalo State ( email )

Classroom BLDG B232
1300 Elmwood Ave
Buffalo, NY 14222
United States
716-878-6031 (Phone)
716-878-6907 (Fax)

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