External Influence on Exchange Rates: An Empirical Investigation of US Pressure and the Chinese RMB

Abstract

Trade imbalances have often led to accusations of “currency manipulation” and efforts to remedy the purported effects of exchange rate misalignment. This paper investigates the impact of US pressure on China to revalue the RMB. Using vector autoregression (VAR) to analyze an original dataset of US statements and actions between 2005 and 2012, we examine the over-time dynamics between US pressure and the nominal RMB/USD exchange rate. A case study of mounting US pressure in advance of the 2010 midterm election illustrates China’s responsiveness in timing adjustments in the RMB to defuse the risk of an international confrontation. Our findings indicate that external political pressures can influence national exchange rate policies under certain conditions.