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The Effect of Exchange Rates on Chinese Trade: A Dual Margin Approach

Bin Qiu, Kuntal Das () and W. Reed ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Previous studies investigating the effect of exchange rate changes on a country’s exports have found little evidence that exchange rates matter. This “Exchange Rate Disconnect Puzzle” may stem from the fact that studies have mostly focused on aggregate data. Using HS- 6 digit product-level data for exports from China, we analyze the effect of real exchange rate as well as the volatility of real exchange rate of the Chinese RMB. By decomposing China’s exports into its “extensive” and “intensive” margins, we find that real exchange rate volatility has a significantly impact on overall Chinese exports that operate via both the extensive and the intensive margins of trade. Real exchange rate volatility increases the uncertainty and deters small and new firms from entering the market or force them to exit the market via the extensive margin. As less firms operate in the export market, the export share of the existing firms increase via the intensive margin. The overall effect of this volatility is slightly positive. We find that these effects are dominant for the sub sample of countries that are the minor trading partners of China compared to its major trading partners. We find weak evidence that real exchange rate depreciation affects China’s exports via the extensive margin.

Keywords: Chinese Trade; Extensive Margin & Intensive Margin; Real Exchange Rate; Volatility (search for similar items in EconPapers)
JEL-codes: F14 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-int and nep-tra
Date: 2018-10-01
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Working Paper: The Effect of Exchange Rates on Chinese Trade: A Dual Margin Approach (2016) Downloads
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