A Revisit of the Nexus between Terms of Trade and RMB Exchange Rate

The relation between the trade of terms and RMB exchange rate is of general interest in resent years. This paper applies cointegration analysis,Granger causality test and vector error correction model to studying the long run as well as the short run linkage between terms of trade and RMB real effective exchange rate,real exchange rate and nominal exchange rate over the period 1978-2006. In the long run,terms of trade Granger causes real effective exchange rate and real exchange rate but not the nominal exchange rate. In other words,the deterioration (improvement) of China's terms of trade can cause the RMB to appreciate (depreciate). There is no causality between terms of trade and nominal exchange rate. In the short run,terms of trade bears a closer correlation with RMB real effective exchange rate with a greater self-error-correcting capacity. There is no evidence that the appreciation of RMB can improve China's terms of trade.