The Cross Relationship Between Exchange Rate and Economic variables in Taiwan and US

[[abstract]]Because the volatility of exchange rate is huge and there exist interaction between Taiwan exchange rate and US exchange rate, we use VAR model, Granger causality test, impulse response analysis and variance decomposition to examine the relationship between economic variables and exchange rate in these two countries. The sample period is from 1990 through 2015, includes 314 samples. The results show that: (1) The relationship of exchange rate between Taiwan and US is significant, and there exist interaction between exchange rate and stock index. (2) US stock market move does Granger cause Taiwan stock market move, and US currency market move does Granger cause Taiwan interest rate move,US interest rate move, and Taiwan money supply move. (3) Taiwan economic variables do not have significant effect on US exchange rate. But there exists significant effect on Taiwan exchange rate for US economic variables shock. (4) In Taiwan and US, the major shock of currency market comes from stock market, and the shock of other domestic economic variables are minor