The RMB USD Exchange Rate and Its Association with Bilateral Trade

Abstract

The Renminbi (RMB) and U.S. dollar (USD) exchange rate and its association with China-U.S. bilateral trade has been a hot issue of debate on both sides of the Pacific for many years. This paper tests the hypothesis that variance of the RMB/USD exchange rate has an association with the bilateral trade deficit. Previous studies' conclusions fall into two opposite camps, with some scholars arguing that the exchange rate has nothing to do with the trade deficit, while other scholars insist it does, at least in the long term. The regression model in my thesis finds that the federal funds rate plays a key role in determining the trade deficit. Based on the findings, I offer different policy recommendations to the U.S. Congress, the Federal Reserve, and Peoples' Bank of China at the end of the paper.