Exchange rate and inflation between China and the United States: A bootstrap rolling-window approach

Abstract

This paper studies the relationship between the exchange rate and inflation within China and the United States using the bootstrap rolling-window approach. We provide robust evidence to show that the purchasing power parity (PPP) theory is invalid for the whole period. The impact of the China-US exchange rate on relative inflation is greater than the effect of relative inflation on the exchange rate. The negative effect of the China-US exchange rate on inflation is more evident from 2006 to 2014, and inflation is more affected by the exchange rate in the US than that in China. The positive effect of US inflation on the China-US exchange rate only exists from January to July 2019 and the negative effect of China’s inflation on the exchange rate merely exists from August 2008 to July 2010 and from September 2010 to May 2011. These findings have important implications for maintaining the stability of prices and currency values in the trade market.