Chinese Exchange Rate and Price Effects on G3 Import Prices

Posted: 1 Oct 2013

See all articles by Brigitte Granville

Brigitte Granville

Queen Mary, University of London

Sushanta Mallick

Queen Mary - University of London; Queen Mary University of London

Ning Zeng

Independent

Abstract

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China’s bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.

Keywords: Price transmission, Exchange rate adjustment, SVAR, VEGARCH, China

JEL Classification: E31, F32, C32, G3

Suggested Citation

Granville, Brigitte Evelyne and Mallick, Sushanta and Mallick, Sushanta and Zeng, Ning, Chinese Exchange Rate and Price Effects on G3 Import Prices. Journal of Asian Economics, Vol. 22, No. 6, 2011, Available at SSRN: https://ssrn.com/abstract=2333721

Brigitte Evelyne Granville (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Sushanta Mallick

Queen Mary - University of London ( email )

School of Business and Management
Mile End Road
London, England E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

Queen Mary University of London ( email )

Mile End Rd
London, E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

Ning Zeng

Independent ( email )

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