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Import Response to Exchange Rate Fluctuations: A Micro-level Investigation

Author

Listed:
  • Yao Amber Li

    () (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Jenny Xu

    () (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Carol Zhao Chen

    (Department of Economics, Hong Kong University of Science and Technology)

Abstract

This paper presents theory and evidence on firms' import responses to exchange rate fluctuations using disaggregated Chinese imports data. The paper develops a heterogeneous-firm trade model that predicts import responses at both extensive and intensive margins as well as the more profound adjustment under ordinary trade than processing trade. Next, the paper empirically investigates import responses to exchange rate fluctuations at extensive and intensive margins in both the short run and the long run, and confirms the model predictions. We also find variations among import responses under different exchange rate regimes, including fixed exchange rate, expected appreciation, and confirmed appreciation.

Suggested Citation

  • Yao Amber Li & Jenny Xu & Carol Zhao Chen, 2015. "Import Response to Exchange Rate Fluctuations: A Micro-level Investigation," HKUST IEMS Working Paper Series 2015-27, HKUST Institute for Emerging Market Studies, revised May 2015.
  • Handle: RePEc:hku:wpaper:201527
    as

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    File URL: http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-27.pdf
    File Function: First version, 2015
    Download Restriction: no

    References listed on IDEAS

    as
    1. Dong, Wei, 2012. "The role of expenditure switching in the global imbalance adjustment," Journal of International Economics, Elsevier, vol. 86(2), pages 237-251.
    2. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, September.
    3. Liao, Wei & Shi, Kang & Zhang, Zhiwei, 2012. "Vertical trade and China's export dynamics," China Economic Review, Elsevier, vol. 23(4), pages 763-775.
    4. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
    5. Miaojie Yu, 2010. "Processing Trade, Firm's Productivity, and Tariff Reductions : Evidence from Chinese Products," Macroeconomics Working Papers 22799, East Asian Bureau of Economic Research.
    6. Li, Hongbin & Ma, Hong & Xu, Yuan, 2015. "How do exchange rate movements affect Chinese exports? — A firm-level investigation," Journal of International Economics, Elsevier, vol. 97(1), pages 148-161.
    7. Xing, Yuqing, 2012. "Processing trade, exchange rates and China's bilateral trade balances," Journal of Asian Economics, Elsevier, vol. 23(5), pages 540-547.
    8. Yu, Miaojie, 2009. "Revaluation of the Chinese Yuan and triad trade: A gravity assessment," Journal of Asian Economics, Elsevier, vol. 20(6), pages 655-668, November.
    9. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    10. Heiwai Tang & Yifan Zhang, 2012. "Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters," CESifo Economic Studies, CESifo, vol. 58(4), pages 671-702, December.
    11. Marazzi, Mario & Sheets, Nathan, 2007. "Declining exchange rate pass-through to U.S. import prices: The potential role of global factors," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 924-947, October.
    12. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 437-492.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    exchange rate; import; extensive margin; intensive margin; processing trade; exchange rate regimes; pass-through;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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