Relationship between RMB Real Exchange Rate and U.S.-China Trade Surplus Using a Structural Vector Error Correction Model

CHEN BIN; Lee Ki-Seong

doi:10.18107/japs.2017.24.2.009

This paper analyzes dynamic relations between RMB real exchange rate and U.S.-China trade surplus by using the Structural Vector Error Correction Model (SVECM). The results indicate that RMB’s appreciation causes effect to the trade surplus in the short-run and little effect in the long-run. Secondly, The results from the variance decomposition analysis further confirm that the movement of China’s trade balance against the U.S. is attributed largely to the U.S. output shock during the post unification period and even before, while the exchange rate effect does not contribute much. These findings seem to suggest that, after about three-decade reform, the Chinese economic system has been gradually transformed towards a market-originated system under which economic agents have become responsive to market signals to allow changes in exchange rates to influence the trade balance. However, the exchange rate effect on China’s balance of trade is still limited.

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