This paper constructs a new dataset of the industry‐specific real effective exchange rate, based on the producer price indices, for Japan, China, and Korea on a monthly basis from January 2001 to February 2013 in order to provide a better indicator for export price competitiveness. By conducting simulation analysis, we found that Korean electrical machinery firms substantially improved their cost competitiveness by lowering their production costs during the Korean won appreciation period, while Japanese firms' large plant investment caused by management misjudgments led to excessive production capacity, which resulted in the deterioration of Japanese export competitiveness. A structural vector autoregression analysis also reveals that industry differences of cost competitiveness as well as nominal exchange rate changes have significant impact on export performances of Japan and Korea.
We estimate the nominal equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis‐à‐vis the US dollar from 1995 to 2009. While most of the recent empirical studies on the EER employ a cross‐country analysis, country‐specific factors, especially supply‐side real factors, are not fully taken into consideration in estimating the EER. To better reflect China’s processing exports in the context of growing intra‐regional trade in Asia, we incorporate in the empirical analysis the source‐country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International input–output (IIO) table for the period from 1995 to 2009. The results show that the nominal EER of the RMB appreciates sharply from 2006 to 2009, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 74 per cent as of 2008 compared to the year 2004 level. Such sharp appreciation of the nominal EER corresponds to the dramatic increase in China’s current account surplus from the mid‐2000s, especially against the United States, which is ascribed to the significant improvement of China’s intermediate input coefficients and, to a lesser extent, an increase in US import prices of intermediate inputs.
This paper empirically analyzes the effect of exchange rate volatility on intra-Asian trade of intermediate goods at an industry level by constructing a new dataset of the industry-specific bilateral real exchange rate. As the final processed exports are destined for countries outside the Asian region, both the exchange rate and world demand are considered as a possible driving force in the cross-border fragmentation and processing trade. It is found that, in contrast to the recent studies, the exchange rate impact on intra-regional trade differs across industries. The exchange rate volatility has negative and significant effects only on the general machinery industry and a part of the electric machinery industry with more differentiated products, even when taking into account the world's demand for the final processed exports. These findings are supported by various kinds of exchange rate volatility in the short-and long-run. Our empirical results suggest that the different impact of the exchange rate volatility across industries is tied to the characteristics of traded goods in respective industries.
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