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Import Response to Exchange Rate Fluctuation: Evidence from Chinese Firms

Authors Li, Yao Amber View this author's profile
Xu, Juanyi View this author's profile
Zhao, Chen HKUST affiliated (currently or previously)
Issue Date 2014
Summary This paper presents theory and evidence on importing responses to exchange rate fluctuations from highly disaggregated Chinese data. The paper first develops a heterogeneous-firm trade model and predicts firms' import responses at both extensive and intensive margins: when domestic currency appreciates, more firms start importing and more products are added into the imported inputs bundle (extensive margin effect); the import value by each firm also increases (intensive margin effect); those import responses are found to be more profound for firms in ordinary trade regime than those in processing trade regime. Next, the paper presents the empirical evidence of Chinese firms' import response to domestic currency appreciation in both the short run and the medium run and confirms the predictions from the model. The results show that the extensive margin effect dominates: an appreciation of local currency significantly increases the probability of firm entry and products adding, which counts for a major source of the increase in China's aggregate import value from 2000 to 2006. We also find that the pattern is more robust for ordinary trade than processing trade, more profound under a fixed exchange rate regime than a managed floating regime (both expected and confirmed). Finally, we investigate the exchange rate pass-through to import prices and find that the incomplete pass through has declined.
Conference 2014 Asian Meeting of the Econometric Society, Academia Sinica, Taipei, Taiwan, 20-22 June 2014
Language English
Format Conference paper
Access Find@HKUST