The relationship between the real exchange rate and balance of payments: empirical evidence for China from cointegration and causality testing

Abstract

This article examines the relationship between the renminbi real exchange rate and China's foreign exchange reserves using cointegration and Granger causality testing. The main findings are that in the long run foreign exchange reserves Granger cause the real exchange rate. Meanwhile, in the short run there is unidirectional Granger causality running from foreign exchange reserves to the real exchange rate.

Acknowledgements

The authors thank Zhongxia Jin for generously providing them with the data and Brett Inder for assistance with the GAUSS codes used to run the unit root tests with structural breaks.