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Exchange Rate Movements and Fundamentals: Impact of Oil Prices and China¡¯s Growth

Shuo Cao and Hongyi Chen
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Hongyi Chen: Hong Kong Institute for Monetary Research

No 42017, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper identifies five factors that can capture 95% of the variance across 39 US dollar exchange rates based on the principal component method. A time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model is used to analyze the determinants of movements in these exchange rates, revealing that impact of global oil prices and China¡¯s growth has increased significantly since 2008. In particular, shocks to these two fundamentals drive the movements of both commodity and non-commodity currencies recently. The impact of monetary policy shocks on the currency pairs is comparatively small.

New Economics Papers: this item is included in nep-ene and nep-mon
Date: 2017-02
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