Exchange-rate volatility and international trade Evidence from China

HAN Qing

Shandong University

Abstract:

The relationship between exchange-rate volatility and international trade volume has always been controversial; empirical investigations do not provide much persuasive evidence for theoretical analysis correlating with the roughness of some key details in research. This paper tries to extend the research frontier in the following three aspects: It measures the exchange-rate volatility as precisely as possible with emphasis on the asymmetric impulse response of exchange-rate volatility that might take place; it implements rigorous endogeneity tests for guidance of IV applications; and it uses simultaneous equations as the general model specification that considers not only export demand but also export supply. This paper addresses the research from the two perspectives of trade direction and trade mode, and the results show there is no reason to believe exchange-rate volatility significantly affects export demand from either perspective. Exchange-rate volatility does, however, suppress China’s export supply. The fact that Chinese exporters’ profit margins have been squeezed might be an important effect of such phenomenon.

Key words:

Exchange-rate volatility, international trade volume, simultaneous equations, processing trade.

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