Testing the Validity of the J-Curve Hypothesis Between China and the United States

Monika Jain and Khanindra Ch. Das ()
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Monika Jain: Birla Institute of Management Technology, Plot No. 5, Knowledge Park II, Greater Noida 201306, Uttar Pradesh, India
Khanindra Ch. Das: Birla Institute of Management Technology, Plot No. 5, Knowledge Park II, Greater Noida 201306, Uttar Pradesh, India

Journal of International Commerce, Economics and Policy (JICEP), 2023, vol. 14, issue 01, 1-18

Abstract: This paper investigates the efficacy of currency management as a policy tool to improve trade balance by analyzing the impact of the real exchange rate on the bilateral trade between the United States and China. The paper builds upon the existing literature and empirical analysis is carried out based on the J-curve hypothesis using quarterly data from 2000Q1 to 2021Q4. The vector-auto regression (VAR) model is estimated using China and the United States’ trade balance, real exchange rate, and GDP. The impulse response functions provide evidence of the J-curve. A shock in Yuan (CNY)-US dollar real exchange rate leads to initial deterioration but improvement in the trade balance in favor of China over subsequent quarters. The results hold for various sub-periods of analysis, i.e., after the exchange rate was allowed to fluctuate since July 2005. Evidence supports that the policy of managing the real exchange rate might have yielded desired results for China.

Keywords: Trade balance; real exchange rate; J-curve; trade war; currency manipulation (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S1793993323500047

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