An Empirical Evidence of the International Fisher Effect on the USD to CNY Exchange Rate

Abstract

Because of the growth of financial globalization in the last decades, international parity relations have been widely considered owing to their significance and influence in investment decisions and international trades. This paper analyses the International Fisher Effect (IFE) considering United State Dollar (USD) and Chinese Yuan Renminbi (CNY) for the period 2002-2014/Q1. In order to reach this objective Augmented Dickey Fuller and Phillip Peron unit root tests are performed to check for stationary. Moreover, Engle-Granger and Johansen co-integration techniques are performed to identify long run relationships. Even if, IFE might not be successful to apply in daily currency transaction, its usefulness consists in its capability to illustrate the expected relation among exchange rates, interest rates and inflation. Further, this information is beneficial in searching export possibilities for countries and in assessing the price of foreign imports.