Empirical Analysis of RMB's Central Parity Formation Mechanism: From August 2015 to November 2019

This thesis works to identify the economic determinants of renminbi(RMB) central parity rate formation from August 2015 to November 2019. It also accesses the effect of the countercyclical factor in the determination of the central parity rate. In a vector error correction framework, the role of the onshore and offshore RMB exchange rate, the US dollar index, and RMB currency index are identified before the implementation of countercyclical factors. During the implementation, onshore and offshore RMB exchange rate both loses part of their explanatory power. Offshore RMB exchange rates even become statistically insignificant in the determination of the central parity rate. After setting the countercyclical factor as neutral in the mechanism, both onshore and offshore exchange rates regain their power and stay significant in the model. The role of the US dollar index gradually lessens in the central parity formation as time goes by. What is surprising is the RMB currency index becomes statistically insignificant when the countercyclical factor is removed in the central parity rate mechanism.