Exchange Rate Movements and Fundamentals: Impact of Oil Prices and the People’s Republic of China’s Growth
35 Pages Posted: 16 Oct 2019
Date Written: March 27, 2019
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: Suggested Citation