An Empirical Analysis of the Relationship between Chinese RMB Fluctuation and Overall Unemployment Rates in US

Abstract

The relation between China's RMB exchange rate and US real economy has recently become a hotly debated issue among scholars, researchers, and policymakers. Using monthly data from Nov. 2001–Nov. 2010, this paper employs the cointegration test and VECM model to capture the relationships among the Chinese RMB exchange rate, US–China bilateral trade, and the US unemployment rate. Results indicate that the US unemployment rate is negatively correlated with the RMB exchange rate. Impulse response analysis discloses the transmission mechanism of RMB appreciation: an appreciation of the RMB leads to a drop in US–China bilateral trade, which associates with a slight rise in the US unemployment rate. A potential explanation for these unconventional results lie in the complementary industrial structures between the two countries. Some policy suggestions are made at the end.