The impact of trade and financial expansion on volatility of real exchange rate.

Zhe Chen,Haibin Lv

doi:10.1371/journal.pone.0262230

Abstract

With the steady progress of China's opening-up policy, how to avoid the financial risks brought by opening-up is a valuable research topic at present while promoting economic development. As an innovative business model connecting the real economy and the virtual economy, the Internet of Things (IoT) finance provides standardized technical support for the expansion of trade and finance. In financial data analysis, deep learning (DL) has become an important means to predict financial market movements, process text information and improve trading strategies. Analysis is conducted on the influence of trade and financial opening on the volatility of real exchange rate. Through the empirical test of panel data of 45 major countries in the world, the pooled ordinary least square (OLS) method and instrumental variable method are used to evaluate the influence of trade and financial opening of sample countries on the volatility of real exchange rate. The main conclusions are that trade openness is negatively correlated with the volatility of real exchange rate, and financial openness is positively correlated with the volatility of real exchange rate. A certain reference is provided for reducing the fluctuation of real exchange rate in the process of opening to the world.

Highlights

The financial liberalization is a theory of economic development put forward by western economists in the 1970s, which gives birth to developing countries’ financial reform titled as “financial liberalization” [1]
The reform of financial system is theoretically promoted by financial liberalization, as well as that the government should lose its restrictions on financial institutions and markets, the financing function should be improved to avoid depending on foreign investment, and the interest rate and exchange rate should be deregulated to meet the actual need of the domestic market
The sharp volatility of exchange rate will lead to the turbulence of foreign exchange and stock market, and affect the macro economy, which will have a profound impact on the real economy

Summary

Introduction

The financial liberalization is a theory of economic development put forward by western economists in the 1970s, which gives birth to developing countries’ financial reform titled as “financial liberalization” [1]. The reform of financial system is theoretically promoted by financial liberalization, as well as that the government should lose its restrictions on financial institutions and markets, the financing function should be improved to avoid depending on foreign investment, and the interest rate and exchange rate should be deregulated to meet the actual need of the domestic market. Due to the integration of international finance and capital market caused by economic opening, the degree of trade and financial opening of each country is significantly improved. The impact of trade and financial expansion on volatility of real exchange rate for preventing financial risks caused by external shocks and formulating economic policies. The innovation is to solve the endogenous problem between trade openness, financial openness, and the volatility of real exchange rate by instrumental variable method. Analyses on the influence of trade and financial opening on the volatility of real exchange rate

Related factors of real exchange rate volatility

The theory of the influence of trade and financial opening on the volatility of real exchange rate

Intelligent trade and financial market supported by “deep learning + Internet of Things”

Instrumental variable regression

Discussion

Conclusion