Examining the relationship between trade balance and exchange rate: the case of China's trade with the USA

Abstract

In this paper, we investigate the nexus between China's trade balance and the real exchange rate vis-à-vis the USA. Using the bounds testing approach to cointegration, we find evidence that China's trade balance and real exchange rate vis-à-vis the USA are cointegrated, and using the autoregressive distributed lag model we find that in both the short run and the long run a real devaluation of the Chinese RMB improves the trade balance; as a result, there is no evidence of a J-curve type adjustment.

Notes

¹ For other recent studies, see Bahmani-Oskooee and Ratha (2004), Narayan (2004), Upadhyaya and Dhakal (1997), Rahman et al. (1997), Nachane and Ranade (1998), Baluswar et al. (1996) and Arora et al. (2003).

² For advantages of the ARDL technique, see Narayan and Narayan (2005a, 2005b); and Narayan and Smyth (2004).