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Exchange-rate effects on China's trade: an interim report

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Author Info
Jaime Marquez
John W. Schindler
Abstract

The rising current account deficit in the USA has attracted considerable attention in recent years. We use the "business cycle accounting" methodology to identify the principal distortions that have affected the external accounts of the US. In particular, we measure distortions in the optimality conditions of a simple two-country general equilibrium model using data from the US and the other G7 countries. We then feed these measured distortions into the model individually and use the simulated counterfactual paths of the current account to determine the contribution of each of these "wedges" to the overall external imbalance of the USA. We find that no single wedge in isolation can account closely for the observed current account. However, a combination of productivity differences and deviations from risk-sharing between the US and the rest of the G7 does the best job in accounting for most of the measured movement of the US current account.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2006-41.

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Date of creation: 2006
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Handle: RePEc:fip:fedfwp:2006-41

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Keywords: Foreign exchange rates - China Trade Econometric models

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sarma Jayanthi & Tamim Bayoumi & Jaewoo Lee, 2005. "New Rates from New Weights," IMF Working Papers 05/99, International Monetary Fund. [Downloadable!]
    Other versions:
  2. CERRA, Valerie & SAXENA, Sweta Chaman, 2003. "How responsive is Chinese export supply to market signals?," China Economic Review, Elsevier, vol. 14(3), pages 350-370. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Willem THORBECKE, 2006. "The Effect of Exchange Rate Changes on Trade in East Asia," Discussion papers 06009, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  5. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier. [Downloadable!] (restricted)
  6. Koichiro Kamada & Izumi Takagawa, 2005. "Policy Coordination in East Asia and across the Pacific," Hi-Stat Discussion Paper Series d05-101, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  7. Deborah L. Swenson, 2004. "Foreign Investment and the Mediation of Trade Flows," Review of International Economics, Blackwell Publishing, vol. 12(4), pages 609-629, 09. [Downloadable!] (restricted)
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  1. Willem Thorbecke, 2006. "How Would an Appreciation of the Renminbi Affect the U.S. Trade Deficit with China?," Topics in Macroeconomics, Berkeley Electronic Press, vol. 6(3), pages 1454-1454. [Downloadable!] (restricted)
  2. Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the Chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers 6/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  3. Li Wang & John Whalley, 2007. "The Impacts of Renminbi Appreciation on Trades Flows and Reserve Accumulation in a Monetary Trade Model," NBER Working Papers 13586, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada. [Downloadable!]
  5. Mizanur RAHMAN & Willem THORBECKE, 2007. "How Would China's Exports be Affected by a Unilateral Appreciation of the RMB and a Joint Appreciation of Countries Supplying Intermediate Imports?," Discussion papers 07012, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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