The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves : empirical evidence from China

Narayan, Paresh Kumar and Smyth, Russell 2006, The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves : empirical evidence from China, Applied financial economics, vol. 16, no. 9, pp. 639-651.

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Title The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves : empirical evidence from China
Author(s) Narayan, Paresh Kumar
Smyth, Russell
Journal name Applied financial economics
Volume number 16
Issue number 9
Start page 639
End page 651
Total pages 12
Publisher Routledge
Place of publication London, England
Publication date 2006-06
ISSN 0960-3107
1466-4305
Summary This article examines the long-run and short-run relationship between China's real exchange rate, foreign exchange reserves and the real interest rate differential between China and the United States using monthly data from 1980 to 2002. Extensive testing for unit roots allowing for up to two structural breaks in the trend indicates that the variables are not integrated of the same order. Thus, the bounds testing approach to cointegration is used, which finds that there is a single long-run relationship between the three variables. In the long run the real exchange rate has a statistically significant positive effect on foreign exchange reserves. The coefficient on the real interest rate differential is also positive, but is statistically insignificant. In the short-run it is found that the relationship between the real exchange rate, real interest rate differential and foreign exchange reserves is non-monotonic.
Language eng
Field of Research 150203 Financial Institutions (incl Banking)
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2006, Taylor and Francis
Persistent URL http://hdl.handle.net/10536/DRO/DU:30024724

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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