An Analysis of Trade Patterns and the Effects of the Real Exchange Rate Movements in East Asia

Moon Jung Choi, Geun-Young Kim and Joo Yong Lee

Emerging Markets Finance and Trade, 2018, vol. 54, issue 7, 1635-1652

Abstract: This article investigates the patterns of vertical specialization in trade among China, Japan and Korea, and the effects of real exchange rate fluctuations under a multistage production process. By extending the models of Yi (2003, 2010), we derive two distinct features of vertical specialization and test them using Time-Varying Parameter (TVP) VAR. We find that a positive shock to China’s final good consumption increases the intermediate goods trade between Korea and China, with expanding magnitude over time. In addition, the positive effect of a real exchange rate depreciation on intermediate goods trade is strengthened through the competitiveness-enhancing channel, with this effect being more pronouncing in Korea-China trade than in Korea-Japan trade.

Date: 2018
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DOI: 10.1080/1540496X.2017.1316712

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