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The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves: empirical evidence from China

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  • Paresh Kumar Narayan
  • Russell Smyth

Abstract

This article examines the long-run and short-run relationship between China's real exchange rate, foreign exchange reserves and the real interest rate differential between China and the United States using monthly data from 1980 to 2002. Extensive testing for unit roots allowing for up to two structural breaks in the trend indicates that the variables are not integrated of the same order. Thus, the bounds testing approach to cointegration is used, which finds that there is a single long-run relationship between the three variables. In the long run the real exchange rate has a statistically significant positive effect on foreign exchange reserves. The coefficient on the real interest rate differential is also positive, but is statistically insignificant. In the short-run it is found that the relationship between the real exchange rate, real interest rate differential and foreign exchange reserves is non-monotonic.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 9 ()
Pages: 639-651

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Handle: RePEc:taf:apfiec:v:16:y:2006:i:9:p:639-651

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Cited by:
  1. Mylonidis, Nikolaos & Paleologou, Suzanna-Maria, 2011. "The real uncovered interest parity: The case of Canada and the USA," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 255-267, March.
  2. Cortes, Maria, 2007. "Examining Patterns of Bilateral Trade between Australia and Colombia by Using Cointegration Analysis and Error-Correction Models," Economics Working Papers wp07-20, School of Economics, University of Wollongong, NSW, Australia.

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