This paper reviews the evolution of China’s real effective exchange rate between 1980 and
2002, and uses a structural vector autoregression model to study the relative importance of
different types of macroeconomic shocks for fluctuations in the real exchange rate. The
structural decomposition shows that relative real demand and supply shocks account for most
of the variations in real exchange rate changes during the estimation period. The paper also
finds that supply shocks are as important as nominal shocks in accounting for real exchange
rate fluctuations, in contrast with other studies that show that, in industrial countries, nominal
shocks are more important in explaining real exchange rate fluctuations.

-------------------- Contents ----------------------

I. Introduction

II. Exchange Rate Regime and Developments―A Historical Overview

III. Theoretical Background and Econometric Framework

IV. Preliminary Data Analysis

V. Estimation Results

VI. Concluding Remarks

References

Total 21 pages