The Dynamics of Real Interest Rates, Real Exchange Rates and the Balance of Payments in China: 1980-2002
IMF Working Papers, April 1, 2003
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- The Dynamics of Real Interest Rates, Real Exchange Rates and the Balance of Payments in China: 1980-2002
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Bibliographic details
- Authors: Zhongxia Jin
- Published: April 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848922.001
Summary and research question
- Based on China's experience between 1980 and 2002, a cointegrated vector autoregression model was established to explore the relationships among real interest rates, real exchange rates and balance of payments in China.
- Taking into account institutional changes, the empirical study shows that significant and usually non-monotonic interactions exist between these three variables.
- The paper discusses theoretical and policy implications of the empirical result.
Methodology
- Empirical approach: cointegrated vector autoregression model applied to Chinese data for the period 1980–2002.
- Institutional considerations: institutional changes in China over the sample period are explicitly taken into account in the empirical analysis.
Key empirical findings
- Significant interactions exist among:
- real interest rates,
- real exchange rates, and
- the balance of payments in China.
- The interactions are usually non-monotonic (i.e., responses do not follow a single-direction relationship across magnitudes or regimes).
Theoretical implications
- The empirical results have implications for theories linking interest rates, exchange rates, and external balances; the study highlights complexities introduced by non-monotonic interactions and institutional change.
Policy implications and discussion
- The paper discusses policy implications of the empirical result; in particular, the analysis is relevant for exchange rate policy and interest rate considerations in the context of balance of payments management in China.