Exchange Rate Movements and Fundamentals: Impact of Oil Prices and the People’s Republic of China’s Growth

35 Pages Posted: 16 Oct 2019

See all articles by Hongyi Chen

Hongyi Chen

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Shuo Cao

Shenzhen Stock Exchange; City University of Hong Kong (CityUHK)

Date Written: March 27, 2019

Abstract

We identify five factors that can capture 95% of the variance across 39 United States (US) dollar exchange rates based on the principal component method. We use a time-varying parameter factor-augmented vector autoregressive model to analyze the determinants of movements in these exchange rates, and reveal that their impact on global oil prices and the People’s Republic of China’s growth has increased significantly since 2008. In particular, the variance of US dollar exchange rates has mainly been driven by these two shocks in recent years. The impact of monetary policy shocks on the currency pairs is comparatively small.

Keywords: exchange rates, commodity prices, People’s Republic of China’s growth, monetary policy, factor model, TVP-FAVAR, Bayesian methods

JEL Classification: C11, C22, F31, G12

Suggested Citation

Chen, Hongyi and Cao, Shuo, Exchange Rate Movements and Fundamentals: Impact of Oil Prices and the People’s Republic of China’s Growth (March 27, 2019). ADBI Working Paper 938, March 2019. Available at SSRN: https://ssrn.com/abstract=3470031 or http://dx.doi.org/10.2139/ssrn.3470031

Hongyi Chen (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Shuo Cao

Shenzhen Stock Exchange ( email )

2012 Shennan Blvd., Futian District
Shenzhen
China

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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