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

journal contribution
posted on 2006-06-01, 00:00 authored by Paresh Narayan, R Smyth
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.

History

Journal

Applied financial economics

Volume

16

Issue

9

Pagination

639 - 651

Publisher

Routledge

Location

London, England

ISSN

0960-3107

eISSN

1466-4305

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2006, Taylor and Francis

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