5. Please look carefully at the figure below showing the RMB exchange rate move

Question

5. Please look carefully at the figure below showing the RMB exchange rate move different measurements for the period from January 1994-April 2017. ....RMB nominal effective exchange rate RMB real effective exchange rate 10 140 Spot RMB/USD (RHS) 130 120 110 100 90 80 60 Figure: RMB Exchange Rates: yuan/dollar, nominal and real effective exchange rate index Data sources: for the yuan/dollar, http://fx sauderubc.ca/cgi/fxdata: for the indexe A. Comment the pattern of the change in the spot rate over time, and discuss its likely relaticn (2010-100), all in monthly average. http://www,bis.org/statistics/eer.htm with the underlying RMB exchange rate regime and its change. Comment on the possible relation between the spot rate and effective inde categorizing it into several sub-periods. xes, perhaps by B. C. Comment on the po ssible relation between the nominal and real nominal effective rate indexes, keeping in mind that the relation may change from time to time.

Explanation / Answer

a) Spot RMB/USD has witnessed a steep downfall that started in December, 2005. However, it started recovery at a slow pace starting from August, 2014 and post that it has shown a continuous but slow upside. For a significant period of 10 years (From February, 1995 to November, 2005) it maintained its level with almost no changes.

Looking at the graph, it is very difficult to establish a clear relationship between Spot RMB/USD and underlying RMB exchange rate. However, since 2005 it has shown an inverse relationship with RMB exchange rate.

b) For the period Jan-1994 to Feb-1995, there seems to be an inverse relationship. Between Mar-1995 to Nov-2005, there is absolutely no relation as spot rate maintains same level for the entire period. Beginning Dec-2005, the relationship seems to be inverse that ends in Mar-2009 and for next two years, there exist no relationship again. From that time, it has shown mostly an inverse relationship as spot moves in opposite direction of the others.

c) Looking at the graph, it is evident that there is a positive relationship between the nominal and real nominal effective rate as they have tend to move in the same direction over the analysis horizon, though the proportionate move varies across the horizon, but the relationship remains positive.

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