The relationship between exchange rate and macroeconomic variables in China

The objective of this study is to provide evidences on the relationship between Renminbi (RMB) exchange rate and macroeconomic variables in China, as well as guidelines for reform of RMB exchange rate regime. The long-run equilibrium relationship between RMB exchange rate and macroeconomic variables of China is examined by applying the non-parametric rank tests proposed by Breitung. Furthermore, this study uses the threshold error-correction model (TECM) to detect the nonlinear casual relationship between RMB exchange rate and macroeconomic variables that are nonlinear forms. The results show that RMB exchange rate and macroeconomic variables have nonlinear relationship with each other. In the long run, these results demonstrate solid evidence that RMB exchange rate and macroeconomic variables support the hypothesis of an asymmetrical error-correction process in China. Our results have important policy implications for Chinese government under study.