Working Paper: NBER ID: w13586
Authors: Li Wang; John Whalley
Abstract: Given the rapidly growing reserves in Asia (China, Japan, Korea, Taiwan) and the pressures from trading partners to revalue, there is a need to examine commercial policy in more than a pure barter model. Here we evaluate the joint impacts of exchange rate appreciation on trade flows and country surpluses using a general equilibrium trade model with a simple monetary structure in which the trade surplus is endogenously determined in the exchange rate setting country and the exchange rate is exogenous. We illustrate its application to the Chinese case using calibration to 2005 data. Our results, while elasticity dependent, suggest that the impacts of Renminbi (RMB) revaluation on the surplus are proportionally larger than on trade flows, and that changes in trade flows can be substantial. Different treatments of China's processing trade have small impact on changes in China's trade flow under RMB appreciation, but significant impacts on the change in the surplus. Results are elasticity dependent; larger substitution elasticities in preferences yield larger effects on trade flows and the surplus.
Keywords: Renminbi appreciation; Trade flows; Reserve accumulation; Monetary trade model
JEL Codes: E5; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RMB appreciation (F31) | trade flows (F10) |
| RMB appreciation (F31) | trade surplus (F14) |
| higher substitution elasticities (D11) | larger effects on trade flows (F69) |
| higher substitution elasticities (D11) | larger effects on trade surplus (F14) |
| RMB appreciation with monetary policy adjustments (F31) | trade surplus (F14) |
| trade flows (F10) | trade surplus (F14) |