Fluctuation of Yuan/Dollar: Time Series Co Integration Analysis

Abstract

In this era of new revolution of globalization and trade liberalization, exchange rates (ER) are one of the fundamental factors in international trade. This research focus on the determinants of trade i.e. Import, export, industrial growth, consumption level and oil prices fluctuation brings changes in exchange rate and its influence eventually on balance of payments in China. Data was collected on annual basis for thirty one years. By applying cointegration, it is estimated that there exist a long run relationship. China has significantly and correctly signs the short run dynamic. Exchange rate does not Granger cause balance of payment and balance of payment does not granger cause exchange rate. In conclusion, we found that the balance of trade, economic growth factors and oil price brings changes in exchange rate. Furthermore, we found the unilateral or bilateral effect of balance of payment and exchange rate. Moreover, apart from the selected determinants of trade, there are many other macroeconomic factors (inflation rates, interest rates, speculation, change in competitiveness, relative strength of other currencies and government debt) and microeconomic factors (political stability position and regional relationship) which may also play role in determination of exchange rates.