The Role of Oil Price Shocks on China's Real Exchange Rate

Abstract

This paper investigates to what extent the oil price shock and three other types of underlying macroeconomic shocks impact the trend movements of China's real exchange rate. By constructing a four-dimensional structural VAR model, the results suggest that real oil price shocks would lead to a minor appreciation of the long-term real exchange rate due to China's lesser dependence on imported oil than its trading partners included in the RMB basket peg regime, and rigorous government energy regulations. The real shocks, as opposed to nominal shocks, are found to be dominant in the variations of the real exchange rate.

Keywords: Oil price shock, Exchange rate regime, China

JEL Classification: F31, F37