Examining the Relationship Between Trade Balance and Exchange Rate: the Case of China's Trade with the Usa

This PDF is a selection from a published volume from the National Bureau of
Economic Research
Volume Title: China 's Growing Role in World Trade
Volume Author/Editor: Robert C. Feenstra and Shang-Jin Wei, editors
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-23971-3
Volume URL: http://www.nber.org/books/feen07-1
Conference Date: August 3-4, 2007
Publication Date: March 2010
Chapter Title: China 's Current Account and Exchange Rate
Chapter Author: Yin-Wong Cheung, Menzie D. Chinn, Eiji Fujii
Chapter URL: http://www.nber.org/chapters/c10461
Chapter pages in book: (231 - 271)

7
China’s Current Account and
Exchange Rate
Yin-Wong Cheung, Menzie D. Chinn, and Eiji Fujii

7.1

Introduction

China—and Chinese economic policy—has loomed large on the global economic stage in recent years. Yet, even as arguments over the normalcy of the Chinese trade balance and the value of the Chinese currency continue, there is substantial debate in both academic and policy circles surrounding what the determinants of these variables are.
Interestingly, there are very few studies that simultaneously assess the
Chinese exchange rate and trade/current account balance. This is partly an outcome of the peculiar characteristics of the Chinese economy. In this study, we attempt to inform the debate over the interactions between the exchange rate and the current account by recourse to two key methodologies.
First, we identify the equilibrium real exchange rate from the standpoint of cross-country studies. Second, we attempt to obtain more precise estimates of Chinese trade elasticities, both on a multilateral and bilateral (with the
United States) basis. In doing so, we hope to transcend the current limited debate based upon rules of thumb.
Yin-Wong Cheung is a professor of economics at the University of California, Santa Cruz, and a guest professor of economics at the Shandong University. Menzie D. Chinn is professor of public affairs

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