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Vertical Trade and China's Export Dynamics

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  • Wei Liao

    (Hong Kong Institute for Monetary Research)

  • Kang Shi

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

  • Zhiwei Zhang

    (China International Capital Corporation)

Abstract

This paper examines how China's exports are affected by exchange rate shocks from countries who supply intermediate inputs to China. We build a simple small open economy model with intermediate goods trade to show that due to the intraregional trade in intermediate goods, a devaluation of other Asian currencies does not necessarily damage China's exports, as imported intermediate goods could become cheaper. This channel through the cost of intermediate goods depends critically on the share of intermediate goods used in China's export goods production and the degree of exchange rate pass-through in imported intermediate goods prices. If prices for intermediate goods are not very sticky, the effect through this channel could be large and China's exports could even benefit. We find the above findings do not depend on China's choice of currency invoicing between RMB and the US dollar or the choice between fixed and flexible exchange rate regimes.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102010.

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Length: 28 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:hkm:wpaper:102010

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Keywords: Vertical Trade; Exchange Rates; Export Dynamics; Currency Invoicing;

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References

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Kang Shi & Juanyi Xu, 2008. "Input Substitution, Export Pricing, and Exchange Rate Policy," Working Papers 102008, Hong Kong Institute for Monetary Research.
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Citations

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Cited by:
  1. Ogundipe, Adeyemi & Amaghionyeodiwe, Lloyd, 2013. "Transnational Trade In Ecowas: Does Export Content Matter?," MPRA Paper 51617, University Library of Munich, Germany.
  2. Shafaeddin, Mehdi, 2010. "The Role of China in Regional South-South Trade in Asia-Pacific: Prospects for industrialization of the low-income countries," MPRA Paper 26358, University Library of Munich, Germany.
  3. Soyoung Kim & Yoonbai Kim, 2012. "The RMB Debate: Empirical Analysis on the Effects of Exchange Rate Shocks in China and Japan," Working Papers 132012, Hong Kong Institute for Monetary Research.
  4. Wong, Chin-Yoong & Eng, Yoke-Kee & Habibullah, Muzafar Shah, 2014. "Rising China, anxious Asia? A Bayesian New Keynesian view," China Economic Review, Elsevier, vol. 28(C), pages 90-106.

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