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Does US quantitative easing affect exchange rate pass†through in China?

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  • Puyang Sun
  • Xinyu Hou
  • Jingjia Zhang

Abstract

In this paper, we show theoretically and empirically that the US quantitative easing (QE) policy results in lower exchange rate pass†through into the destination prices of Chinese exporters. In addition, the more the exchange rate in the export destination appreciates than the Chinese yuan, the stronger this effect becomes. Our model combines various marginal effects of QE policy on the destinations of Chinese exporters and variable markups of export firms due to strategic complementarities. The model predicts that the impact of US QE policy on the pass†through of Chinese exporters depends on its spillover on the exchange rate between China and the export destination of different firms. We provide strong support for the model predictions using Chinese firm†product†level data with information on export destinations. The baseline result and the heterogeneity we find in the response of exchange rate pass†through of Chinese exporters to US QE policy remain robust to alternative measures of samples and controls.

Suggested Citation

  • Puyang Sun & Xinyu Hou & Jingjia Zhang, 2018. "Does US quantitative easing affect exchange rate pass†through in China?," The World Economy, Wiley Blackwell, vol. 41(1), pages 242-261, January.
    • Handle: RePEc:bla:worlde:v:41:y:2018:i:1:p:242-261
    DOI: 10.1111/twec.12576
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    Cited by:

    1. Idris Abdullahi Abdulqadir, 2022. "The nonlinearity of exchange rate pass‐through on currency invoice: A quantile, generalized method of moments and threshold effect‐test from sub‐Sahara African economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1473-1494, January.

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