Analysis on the Relationship Between China-US Exchange Rate Fluctuations and Short-Term Cross-Border Capital Flows

Abstract

The exchange rate, as a key indicator of a country's economic health and policy direction, has profound implications for international trade and cross-border investments. This study explores the relationship between the RMB exchange rate and short-term international capital flows (SICF) and employs various economic analysis methods to delve into this issue. The main findings of the study include, firstly, there exists a cointegration relationship between the RMB exchange rate and short-term international capital flows, indicating a long-term equilibrium relationship between them rather than just short-term fluctuations; secondly, Granger causality test results suggest a bi-directional causal relationship between these two variables, with changes in the RMB exchange rate being used to predict changes in international capital flows, and vice versa. Additionally, the estimated results of the VAR model established reveal linear relationships among five key variables and exhibit a high degree of fit. Finally, variance decomposition analysis reveals that the RMB exchange rate gradually becomes an important factor in the volatility of short-term capital flows, while the volatility of short-term capital flows itself gradually decreases.