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Exchange rate sensitivity of China’s bilateral trade flows

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Author Info

  • Wang, Jiao

    ()
    (BOFIT)

  • Ji, Andy G.

    ()
    (BOFIT)

Abstract

Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices. Such studies relied heavily on aggregated trade data. More recent studies employ bilateral trade data and methodologies such as ECM and gravity models. This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China. Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China’s trade balance. Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China’s anticipated shift toward a more flexible exchange rate regime fails to address China’s trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility. It appears a major overhaul of the country’s heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China’s international trade.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 19/2006.

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Length: 72 pages
Date of creation: 31 Dec 2006
Date of revision:
Handle: RePEc:hhs:bofitp:2006_019

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Keywords: exchange rate; trade; China; competition; gravity model; panel;

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References

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  1. Campa, Jose M., 2002. "Exchange rate crises and bilateral trade flows in Latin America," IESE Research Papers D/470, IESE Business School.
  2. Tilak Abeysinghe & Tan Lin Yeok, 1998. "Exchange rate appreciation and export competitiveness. The case of Singapore," Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 51-55.
  3. Jeffrey A. Frankel and Shang-Jin Wei., 1995. "European Integration and the Regionalization of World Trade and Currencies: The Economics and the Politics," Center for International and Development Economics Research (CIDER) Working Papers C95-053, University of California at Berkeley.
  4. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  5. Anuradha Dayal-Gulati & Valerie Cerra, 1999. "China's Trade Flows," IMF Working Papers 99/1, International Monetary Fund.
  6. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
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Citations

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Cited by:
  1. Matthieu Bussière & Bernd Schnatz, 2009. "Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark," Open Economies Review, Springer, vol. 20(1), pages 85-111, February.
  2. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2009. "China's Current Account and Exchange Rate," CESifo Working Paper Series 2587, CESifo Group Munich.
  3. Tiwari, Aviral & Shahbaz, Muhammad, 2011. "India's trade with USA and her trade balance: An empirical analysis," MPRA Paper 29023, University Library of Munich, Germany.
  4. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.
  5. Natalya Ketenci & Idil Uz, 2011. "Bilateral and regional trade elasticities of the EU," Empirical Economics, Springer, vol. 40(3), pages 839-854, May.
  6. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, Xing Wang, 2012. "Are Chinese Trade Flows Different?," BOFIT Discussion Papers 14/2012, Bank of Finland, Institute for Economies in Transition.
  7. Jinhwan Oh & Orgilbold Tumurbaatar, 2011. "Mongolia's International Trade: Impact of Its Geographical Location," Working Papers EMS_2011_02, Research Institute, International University of Japan.
  8. Anca GHERMAN & George ŞTEFAN & Adriana FILIP, 2013. "Exchange rate volatility effects on export competitiveness. Romanian Case," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(9(586)), pages 39-50, September.

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