Do Traditional Models or the Dominant Currency Paradigm Explain China’s Export Behavior?

Willem Thorbecke, Chen Chen and Nimesh Salike

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Traditional models indicate that appreciations of the exporting country’s currency relative to the importing country’s currency decrease exports. The dominant currency paradigm (DCP) holds that, since so much trade is invoiced in U.S. dollars (USD), a change in the importing country’s currency relative to the USD rather than relative to the exporting country’s currency influences trade. We seek to choose between these hypotheses for China, the world’s largest exporter. The results indicate that both the traditional model and the DCP framework help to explain China’s exports over the 1995-2018 period. When we focus on the period before renminbi internationalization policies increased renminbi invoicing, we find that the DCP framework no longer has explanatory power, but the bilateral RMB exchange rate does. We find that one reason for this puzzling finding is that exchange rates in countries that provide parts and components to China are correlated with the bilateral RMB rate and influence China’s exports.

Pages: 28 pages
Date: 2024-06
New Economics Papers: this item is included in nep-cna, nep-ifn, nep-int and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:24062

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