News shocks and the exchange rate in a DSGE model of China

Yang, Liuyu 2024. News shocks and the exchange rate in a DSGE model of China. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis explores the dynamics of China’s exchange rates using an open economy DSGE model and assesses the effects of news shocks constrained by the signal extraction process. This model, representing a three-country open economy framework with China as the home country, the US as the foreign country, and a rest of the world component functioning as a transfer pot is estimated and evaluated by Indirect Inference method. The sample period spans from 2005Q3 to 2021Q4, encompassing China's shift from a dollar-peg to a managed floating exchange rate regime. We find the model empirically fits the data and the non-stationary productivity shocks are the primary driver of the real exchange rate fluctuations, while monetary shocks surpass productivity shocks in influencing the nominal exchange rate. Subsequently, the model is extended to incorporate news shocks, which are constrained by the signal extraction process that has been overlooked in the literature (Le et al., 2020). However, the incorporation of anticipated shocks diminishes the model’s ability to match the data, as indicated by the higher Wald statistic. When news shocks are perfectly anticipated, they do not substantially alter the conclusions drawn from the base model, although the degrees of response differ

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	Open economy, DSGE, News shocks, Exchange rate, Indirect Inference
Date of First Compliant Deposit:	11 April 2024
Last Modified:	11 Apr 2024 14:23
URI:	https://orca.cardiff.ac.uk/id/eprint/167883

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