Relationships between exchange rates, economic growth and FDI in China: An empirical study based on the TVP-VAR model

Volume: 1/2017
Issue: 1
Author: Wang Shu-ping, Wei Xiao-meng
Keywords: economic growth, exchange rate, FDI, TVP-VAR model.

Abstract: This paper investigates the relationships between exchange rates, economic growth and foreign direct investment through a time-variant parameter VAR model using monthly data from China for the period 2001-2016. The focus is on the reaction of economic growth to a shock change in exchange rates or foreign direct investment. The dynamic impulse response function showed that the relationships do not instigate great change. A positive shock in the real exchange rate slows down FDI inflows, with no evidence to support the contractionary devaluation theory in China, which suggests that an increase in the real RMB exchange rate generally causes a negative influence on China’s economic growth. The empirical results of this research contradict what intuition suggests and indicates that FDI has generated an ambiguous effect on economic growth in the past few years. Before 2008, shock changes in FDI would cause economic growth to lag for one period. Since then, the lag phenomenon has disappeared due to better regulation and a maturing financial market.

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