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Exchange-rate effects on China's trade: an interim report

  • Jaime Marquez
  • John W. Schindler
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    The rising current account deficit in the USA has attracted considerable attention in recent years. We use the "business cycle accounting" methodology to identify the principal distortions that have affected the external accounts of the US. In particular, we measure distortions in the optimality conditions of a simple two-country general equilibrium model using data from the US and the other G7 countries. We then feed these measured distortions into the model individually and use the simulated counterfactual paths of the current account to determine the contribution of each of these "wedges" to the overall external imbalance of the USA. We find that no single wedge in isolation can account closely for the observed current account. However, a combination of productivity differences and deviations from risk-sharing between the US and the rest of the G7 does the best job in accounting for most of the measured movement of the US current account.

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    Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2006-41.

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    Date of creation: 2006
    Date of revision:
    Handle: RePEc:fip:fedfwp:2006-41
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    1. Anuradha Dayal-Gulati & Valerie Cerra, 1999. "China's Trade Flows: Changing Price Sensitivies and the Reform Process," IMF Working Papers 99/1, International Monetary Fund.
    2. Willem Thorbecke, 2011. "The Effect of Exchange Rate Changes on Trade in East Asia," Trade Working Papers 23274, East Asian Bureau of Economic Research.
    3. Vanessa Rossi, 2005. "Is revaluation of the renminbi good news?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 29-36, 06.
    4. International Monetary Fund, 2005. "New Rates from New Weights," IMF Working Papers 05/99, International Monetary Fund.
    5. Deborah L. Swenson, 2004. "Foreign Investment and the Mediation of Trade Flows," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 609-629, 09.
    6. Cerra, Valerie & Saxena, Sweta Chaman, 2003. "How responsive is Chinese export supply to market signals?," China Economic Review, Elsevier, vol. 14(3), pages 350-370.
    7. Koichiro Kamada & Izumi Takagawa, 2005. "Policy Coordination in East Asia and across the Pacific," Bank of Japan Working Paper Series 05-E-4, Bank of Japan.
    8. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
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