The Analysis Of Correlation Between Output And Exchange Rate Based On Var Model

After several years' high speed,the growth rate of Chinese economy now slowed down, and it has some certain relationship with the RMB exchange rate. We choose the data from January2016 to December 2014,then we use Granger causality test, VAR model, variance decomposition and robustness tests to examine the relationship between real effective exchange rate and output. The empirical results show that, after controlling the spurious correlation between the RMB real effective exchange rate and output, the two still has a certain relationship. Meanwhile, the inflation rate has a certain impact on the real effective exchange rate and output, indicates that as a conduit between the two, the inflation rate has an essential role. The inflation rate shall be controlled in a moderate range to release the pressure of RMB appreciation. What's more, government expenditure and money supply is explanatory to the exchange rate and output, which means that China's fiscal policy and monetary policy are important in promoting economic growth. In addition, from the perspective of international finance, the impact of US federal funds rate is less than that of domestic variables, and it suggests that the international financial channel does not have a strong impact on C hinese economy. Thus the authorities shall continue to attach importance to the capital inflows and speed up the process of internationalization of the RMB. Then some recommendations on RMB exchange rate system reform are given: firstly, the exchange rate flexibility shall be increased; secondly, a certa in level of foreign exchange reserves shall be maintained; and the last is to promote the liberalization of RMB capital account appropriately.