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The trade balance and the real exchange rate

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  • Enisse Kharroubi

Abstract

Globalisation has affected the relationship between the trade balance and the real exchange rate in two ways. On the one hand, the growth of trade taking place within industries makes the trade balance more sensitive to real exchange movements. On the other hand, a higher degree of vertical specialisation and more global supply chains act to reduce this sensitivity. The relative importance of these two effects varies across countries. According to the estimates presented in this article, changes in the real exchange rate could play a larger role in curbing the US trade deficit than in reducing the Chinese trade surplus. This confirms that real exchange rate adjustment is only part of the solution for global rebalancing, and needs to be accompanied by other policy actions.

Suggested Citation

  • Enisse Kharroubi, 2011. "The trade balance and the real exchange rate," BIS Quarterly Review, Bank for International Settlements, September.
  • Handle: RePEc:bis:bisqtr:1109e
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    References listed on IDEAS

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    1. Yin-Wong Cheung & Menzie Chinn & Eiji Fujii, 2009. "Pitfalls in Measuring Exchange Rate Misalignment," Open Economies Review, Springer, vol. 20(2), pages 183-206, April.
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    Cited by:

    1. repec:prg:jnlpol:v:2017:y:2017:i:6:id:1168:p:649-668 is not listed on IDEAS
    2. Erdal Ozmen & Duygu Yolcu-Karadam, 2014. "Structural Change in Turkish External Trade: Evidence from BEC Sectors," ERC Working Papers 1413, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    3. Carlos A. Ibarra, 2014. "Trade, investment, and capital flows:Mexico's macroeconomic adjustment to the Great Recession," Working Paper Series Sobre México 2014002, Sobre México. Temas en economía.
    4. Jonathan Kearns & Nikhil Patel, 2016. "Does the financial channel of exchange rates offset the trade channel?," BIS Quarterly Review, Bank for International Settlements, December.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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