The Relationship between RMB Exchange Rate and Chinese Trade Balance: Evidence from a Bootstrap Rolling Window Approach

Abstract

This study inspects the fundamental relationship between the exchange rate and the trade balance in China. The outcome shows that the real effective exchange rate and trade balance in China has no causal relationship. Though, seeing structural changes in two series, we got the result those both long-run and short-run associations using full-sample data are wobbly, which proposes that the full-sample causation tests can"t be relied upon. Then, using time-varying rolling window method to reexamine the dynamic fundamental relationship. The results show that real effective exchange rate has both negative and positive impacts on the trade balance in several sub-periods, and in turn, trade balance has same impact on real effective exchange rate for China. These findings provide no support for the existence of J-curve effect and Marshall-Lerner Condition in case of China. This study shows that it is impossible to resolve China"s trade deficit, depending only on the movement of RMB"s exchange rate.

Impact of Devaluation on Balance of Trade: A Context of Neighboring Countries

“…Nawaz and Ghani (2018) established a negative relationship between devaluation and output growth for Pakistan, and Onakoya, Johnson, and Ajibola (2019) also found a negative relationship between devaluation and trade balance for Nigeria in the long run. Masih, Liu, and Pervaiz (2018) found no relationship between devaluation and trade balance for China. The indirect effect of devaluation is also seen empirically such as Olawole, Adebayo, and Idowu (2018) found negative impact of financial openness on economic growth for Nigeria, while Ali (2016) found a positive relationship between currency evaluation and interest rate for Pakistan.…”

The effect of exchange rate movements on trade balance performance in Egypt: Is there a J-curve phenomenon?

“…The elasticity approach relates the effect of exchange rate changes on TB to the price elasticities of demand and supply for exports and imports. Studying this relationship conditional to the sum of the price elasticities of demand for exports and imports is called Marshall-Lerner Condition (Baek, Koo, and Mulik, 2009;Bahmani-Oskooee et al, 2016;Drama, 2010;Masih, Liu and Pervaiz, 2018;Tutuianu, 2015). This approach studies this relationship as a net effect of real exchange rates changes on both prices and volume of traded goods 5 (Ali et al, 2014;Andersson and Styf, 2010;Chiloane et al, 2014;Choi, 2017;Hussain and Bashir, 2012;Lencho, 2013).…”

“…The J-curve phenomenon started as a dynamic representation of Marshall-Lerner Condition. It studied how the effects of devaluation on TB can vary over time as elasticities changes (Andersson and Styf, 2010;Chiloane et al, 2014;Drama, 2010;Masih et al, 2018;Musawa, 2014). In the short-term, demand for exports and imports are less-elastic.…”

“…While it was proved in case of Thailand's trade with US and Japan, it was not for Malaysia's trade balance against US and Japan. Masih et al (2018) tested the relationship between exchange rate changes and TB in China. The study found that there is no evidence for this relationship whether in the long-term or the short-term.…”

Revisiting the asymmetry between the exchange rate and domestic production in South Asian Economies: Evidence from Nonlinear ARDL Approach

“…In recent years, the nexus between the exchange rate and EG is an extensively debated issue in the literature and is the central macroeconomic goal of economic policy agenda across the globe (Easterly & Levine, 1997;Fischer, 1992;Knight, Loayza, & Villanueva, 1993;Most & De Berg, 1996). Many other studies investigating the impact of exchange rate uncertainty on EG reported mixed findings (Ahmad, Hayat, Luqman, & Ullah, 2012;Akhtar & Malik, 2000;Ali & Anwar, 2016;Baron, 1976;Bini-Smaghi, 1991;Cushman, 1983;De Grauwe & Verfaille, 1988;Gros, 1987;Hasan & Khan, 1994;Hassan, Fausat, & Baba, 2016;Kandil, 2008;Kappler, Reisen, Schularick, & Turkisch, 2013;Khan, 1995;Kohler, Manalo, & Perera, 2014;Masih, Liu, & Pervaiz, 2018;Nawaz & Ghani, 2018;Yang, 1997). Numerous studies in recent years have provided compelling evidence regarding the effect of exchange rate uncertainty on the EG of developing economies (Algaeed & Algethami, 2022), Saudi Arabia (Khan, 2021), Bangladesh (An, Binh, & Cam, 2020), and ASEAN (Matthew et al, 2021).…”