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

Hongyi Chen and Shuo Cao
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Hongyi Chen: Asian Development Bank Institute

No 938, ADBI Working Papers from Asian Development Bank Institute

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 (search for similar items in EconPapers)
JEL-codes: C11 C22 F31 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-03-27
New Economics Papers: this item is included in nep-cna, nep-ene and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbiwp:0938

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