BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 19/2006:
Exchange rate sensitivity of China’s bilateral trade flows
Jiao Wang ()
and Andy G. Ji ()
Abstract: 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.
Keywords: exchange rate; trade; China; competition; gravity model; panel; (follow links to similar papers)
JEL-Codes: C22; C22; F14; F31; (follow links to similar papers)
72 pages, December 31, 2006
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