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The Exchange Value of the Renminbi and China's Balance of Trade: An Emp irical Study

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  • Zhaoyong Zhang

Abstract

This paper aims at assessing the relationship between the exchange value of the Chinese Renminbi (RMG) and China's trade balance by means of some recent econometric techniques designed to evaluate the existence and the direction of causality. We find strong evidence suggesting that changes in the trade balance and each of its components Granger-cause changes in the exchange rate but no evidence indicating a causal link running from the exchange rate to the trade balance. Our results seem to be rather supportive of the accommodative role of the exchange rate proposed by the modern theory of the trade balance determination and not supportive of the existence of a J-curve in China's trade balance. Our finding of a bidirectional causal relationship between the real exchange rate and the price variables confirms the presence of a vicious circle hypothesis following currency devaluation. This has important implications for the discussions of impacts of the RMB devaluation on China's trade balance.

Suggested Citation

  • Zhaoyong Zhang, 1996. "The Exchange Value of the Renminbi and China's Balance of Trade: An Emp irical Study," NBER Working Papers 5771, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5771
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    References listed on IDEAS

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    6. Gruen, David W R & Wilkinson, Jenny, 1994. "Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 204-219, June.
    7. Jeremy Greenwood, 1984. "Non-traded Goods, the Trade Balance, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 806-823, November.
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    9. Brada, Josef C & Kutan, Ali M & Zhou, Su, 1993. "China's Exchange Rate and the Balance of Trade," Economic Change and Restructuring, Springer, vol. 26(3), pages 229-242.
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    Citations

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    Cited by:

    1. Zhang, Yin & Wan, Guanghua, 2007. "What accounts for China's trade balance dynamics?," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 821-837.
    2. John Ryan, 2009. "China and the Global Roles of Currencies," Working Papers 2009.8, International Network for Economic Research - INFER.
    3. Zhang, Yin & Wan, Guanghua, 2008. "Correcting China's trade imbalance: Monetary means will not suffice," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 505-521.
    4. repec:kap:iaecre:v:9:y:2003:i:2:p:140-151 is not listed on IDEAS
    5. Ryan, John, 2009. "China and the Reserve Currency Question," MPRA Paper 18218, University Library of Munich, Germany.
    6. Ignacio Mauleón & Raul Larrion, 2003. "Growth and the current account: Malaysia and Singapore," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(2), pages 140-151, May.
    7. Sweta Chaman Saxena & Valerie Cerra, 2002. "An Empirical Analysis of China's Export Behavior," IMF Working Papers 02/200, International Monetary Fund.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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