The implications of liquidity expansion in China for the US dollar

Wensheng Kang, Ronald Ratti and Joaquin Vespignani

No 264, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: The value of the US dollar is of major importance to the world economy. Global liquidity has grown sharply in recent years with growing importance of China?s money supply to global liquidity. We develop out-of-sample forecasts of the US dollar exchange rate value using US and non-US global data on inflation, output, interest rates, and liquidity on the US, China and non-US/non-China liquidity. Monetary model forecasts significantly outperform a random walk forecast in terms of MSFE at horizons over 12 to 30 months ahead. A monetary model with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of variables in forecasting the US dollar. China?s liquidity has a distinct, significant and changing influence on the US dollar exchange rate. Post global financial crisis, increases in the growth rate in China?s M2 forecast a significantly higher value for the US dollar 12 months and 18 months ahead and significantly lower values for the US dollar 24 and 30 months.

JEL-codes: E41 E51 F31 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-01-01
New Economics Papers: this item is included in nep-cba, nep-cna, nep-for, nep-mac and nep-mon
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Related works:
Working Paper: The implications of liquidity expansion in China for the US dollar (2016)
Working Paper: The implications of liquidity expansion in China for the US dollar (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:264

DOI: 10.24149/gwp264

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