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Exchange rate sensitivity of China’s bilateral trade flows

  • Wang, Jiao

    ()

    (BOFIT)

  • Ji, Andy G.

    ()

    (BOFIT)

Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices. Such studies relied heavily on aggregated trade data. More recent studies employ bilateral trade data and methodologies such as ECM and gravity models. This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China. Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China’s trade balance. Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China’s anticipated shift toward a more flexible exchange rate regime fails to address China’s trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility. It appears a major overhaul of the country’s heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China’s international trade.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp1906.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 19/2006.

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Length: 72 pages
Date of creation: 31 Dec 2006
Date of revision:
Handle: RePEc:hhs:bofitp:2006_019
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  1. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
  2. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  3. Jeffrey A. Frankel and Shang-Jin Wei., 1995. "European Integration and the Regionalization of World Trade and Currencies: The Economics and the Politics," Center for International and Development Economics Research (CIDER) Working Papers C95-053, University of California at Berkeley.
  4. Campa, Jose M., 2002. "Exchange rate crises and bilateral trade flows in Latin America," IESE Research Papers D/470, IESE Business School.
  5. 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.
  6. Tilak Abeysinghe & Tan Lin Yeok, 1998. "Exchange rate appreciation and export competitiveness. The case of Singapore," Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 51-55.
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