| Abstract | This paper proposes a new analysis of RMB exchange rate floating model in frequency domain. Using 2002M1-2012M2 Sino-US industry-level panel data, we present evidence of “frequency dependence” in the classic elasticity analysis model developed by Goldstein & Kahn (1985). To avoid the feedback of exchange rate series, we apply moving window one-sided bandpass filters to partial the exchange rate series into 19 different frequency components. Through pooled OLS, random effect and fixed effect estimation, we find significant negative exchange rate volatility shocks in low-frequency and extreme high-frequency domain, however, moderate-frequency exchange rate volatility are favorable for Chinese currency account. Consequently, total amount and cross-industry frequency-domain granger test confirm robustness of the former estimation results. So China needs to introduce market mechanisms to cultivate exchange rate volatility, however, fierce volatility should be controlled, Generally, keeping RMB exchange rate volatility at 1.5-2.5 frequency(say 2.5 to 4 months period) is favorable for the stability of Chinese currency account. |