Rmb Real Exchange Rate Fluctuations, The Reasons For Empirical Research

In order to investigate the major sources causing the real exchange rate fluctuations in China, this paper estimates a structural Vector Autoregressive Model (VAR) composed of four variables (foreign interest rate, production, real exchange rate, and prices), which represents external, offer, demand and nominal shocks respectively. And this paper carries out the conventional exercise of impulse response functions and of variance decomposition of forecast error in order to quantify the relative contribution of the different shocks to real exchange rate fluctuations. In this paper, the investigation suggests that domestic shocks especially demand shocks dominate real exchange rate fluctuations and that the contribution of external shocks is relatively low. The budgetary tool therefore remains efficient to stabilize the real exchange rate in terms of possible external shocks. It is also fund in this paper that external shocks are the major sources of production and prices fluctuations, which conforms to the strong dependence with respect to the world economy of China. Moreover, the study of this paper shows that nominal shocks are less important in explaining either real exchange rate fluctuations or production and prices fluctuations. The low contribution of the nominal shocks put into question monetary policies that seek to promote competitiveness through currency devaluation.