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Nonlinear bilateral trade balance-fundamentals nexus: A panel smooth transition regression approach

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  • Wu, Po-Chin
  • Liu, Shiao-Yen
  • Pan, Sheng-Chieh

Abstract

This paper investigates the threshold effects on the impacts of fundamentals (i.e., incomes, exchange rates, oil prices, and import-weighted distances) on China's trade balances with the G7 countries between 1975 and 2010 by using a panel smooth transition regression (PSTR) model with the transition variable of lagged real interest rate differential. The empirical results show that the relationship between the trade balance and the fundamentals is rather nonlinear, changing over time and across countries depending on the lagged real interest rate differential during the different regimes. Moreover, China's bilateral trade balance responds significantly to the changes in relative real income differentials, real oil prices, and import-weighted distance. If the Federal Reserve adopts an expansionary monetary policy in the near future, China would still accumulate higher bilateral trade surpluses from most of the G7 countries, as long as the following situations exist: an increase in China's relative real per capita income, a slow increase in real oil price, and a stable RMB (the Chinese currency) exchange rate system.

Suggested Citation

  • Wu, Po-Chin & Liu, Shiao-Yen & Pan, Sheng-Chieh, 2013. "Nonlinear bilateral trade balance-fundamentals nexus: A panel smooth transition regression approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 318-329.
  • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:318-329
    DOI: 10.1016/j.iref.2012.10.010
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    6. Bahmani-Oskooee, Mohsen & Harvey, Hanafiah & Hegerty, Scott W., 2014. "Industry trade and exchange-rate fluctuations: Evidence from the U.S. and Chile," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 619-626.
    7. Chiu, Yi-Bin & Sun, Chia-Hung D., 2016. "The role of savings rate in exchange rate and trade imbalance nexus: Cross-countries evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 1017-1025.
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    11. Erdogan, Ayse M., 2014. "Bilateral trade and the environment: A general equilibrium model based on new trade theory," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 52-71.
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    13. Seghir, Majda & Damette, Olivier, 2013. "Natural resource curse: a non linear approach in a panel of oil exporting countries," MPRA Paper 51604, University Library of Munich, Germany.
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