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The impacts of Renminbi appreciation on trade flows and reserve accumulation in a monetary trade model

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  • Whalley, John
  • Wang, Li

Abstract

Given the rapidly growing reserves in Asia (China, Japan, Korea, and Taiwan) and the pressures from trading partners to revalue, there is a need to examine commercial policy in more than a pure barter model. Here we evaluate the joint impacts of exchange rate appreciation on trade flows and country surpluses using a general equilibrium trade model with a simple monetary structure in which the trade surplus is endogenously determined in the exchange rate setting country and the exchange rate is exogenous. We illustrate its application to the Chinese case using calibration to 2005 data. Our results, while elasticity dependent, suggest that the impacts of Renminbi (RMB) revaluation on the surplus are proportionally larger than on trade flows, and that changes in trade flows can be substantial. Different treatments of China's processing trade have small impact on changes in China's trade flow under RMB appreciation, but significant impacts on the change in the surplus. Results are elasticity dependent; larger substitution elasticities in preferences yield larger effects on trade flows and the surplus.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 1 ()
Pages: 614-621

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:614-621

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Renminbi appreciation; Monetary trade model; China's surplus;

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References

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  1. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Working Paper Series 2006-41, Federal Reserve Bank of San Francisco.
  2. Philippe Bacchetta & Eric van Wincoop, 2006. "Incomplete information processing: a solution to the forward discount puzzle," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Willenbockel, Dirk, 2006. "Structural Effects of a Real Exchange Rate Revaluation in China: A CGE Assessment," MPRA Paper 920, University Library of Munich, Germany.
  5. Imam, Hasan & Whalley, John, 1982. "General equilibrium with price intervention policies: a computational approach," Journal of Public Economics, Elsevier, vol. 18(1), pages 105-119, June.
  6. Koichiro Kamada & Izumi Takagawa, 2005. "Policy coordination in East Asia and across the Pacific," International Economics and Economic Policy, Springer, vol. 2(4), pages 275-306, December.
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Cited by:
  1. Sabri, Nidal Rachid & Peeters, Marga & Abulaben, Diama K., 2012. "The impact of exchange rate volatility on trade integration among North and South Mediterranean countries," MPRA Paper 38080, University Library of Munich, Germany.
  2. Dong, Yan & Whalley, John, 2012. "Gains and losses from potential bilateral US–China trade retaliation," Economic Modelling, Elsevier, vol. 29(6), pages 2226-2236.
  3. John Whalley, 2012. "External Sector Rebalancing and Endogenous Trade Imbalance Models," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(4), December.

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