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

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Listed:
  • Shuo Cao

    (Shenzhen Stock Exchange)

  • Hongyi Chen

    (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.

Suggested Citation

  • Shuo Cao & Hongyi Chen, 2017. "Exchange Rate Movements and Fundamentals: Impact of Oil Prices and China¡¯s Growth," Working Papers 042017, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:042017
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