The impact of real effective exchange rate volatility on economic growth in the process of renminbi internationalization an empirical study based on VAR model

Abstract

Based on the theoretical analysis of mechanism of exchange rate changes on economic growth, this paper examines the impact of real effective exchange rate volatility on economic growth over the period 1995–2014 in the process of RMB internationalization through establishing the VAR model. The results show a significant negative relation between the real effective exchange rate rise and import and export trade, but the time of the influence on the import is shorter than the export, therefore, in the long term, the increase of the RMB real effective exchange rate may cause a decline in net exports. The real effective exchange rate volatility has a negative impact on FDI both in the short term and long term, but the effect is not significant. Above all, the increase of the RMB real effective exchange rate may have a positive impact on economic growth in the short term, but in the long run, it will have a significant negative effect on economic growth. Therefore, we should pay more attention to the continued appreciation of the RMB brought about by the increase in international demand and establish relate measures to stable real exchange rate and maintain sustained economic growth on the basis of preventing the RMB exchange crisis.