Import Response to Exchange Rate Fluctuations: A Micro-Level Investigation

48 Pages Posted: 20 Mar 2015

See all articles by Yao Amber Li

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

Juanyi (Jenny) Xu

Hong Kong University of Science & Technology (HKUST); Simon Fraser University (SFU); Hong Kong University of Science & Technology (HKUST) - Department of Economics

Chen Zhao

Hong Kong University of Science & Technology (HKUST)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015

Abstract

This paper presents theory and evidence on firms' import responses to exchange rate fluctuations using highly disaggregated data of Chinese imports from OECD countries. The paper first develops a heterogeneous-firm trade model and predicts firms' import responses at both the 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), and the import value by each firm also increases (intensive margin effect). The model also predicts that those import responses are more profound for firms in ordinary trade than for those in processing trade. Next, the paper empirically investigates firms' import responses to exchange rate fluctuations at extensive and intensive margins in both the short run and the long run, and all the model predictions are confirmed. The predicted pattern is more robust in the long run than in the short run. We also find variations among import responses under different exchange rate regimes (including a fixed exchange rate regime, an expected appreciation regime, and a confirmed appreciation regime). Finally, we investigate the exchange rate pass-through to import prices and find that incomplete pass-through has declined.

Keywords: exchange rate, import, extensive margin, intensive margin, processing trade, exchange rate regimes, pass-through

JEL Classification: F14, F31

Suggested Citation

Li, Yao Amber and Xu, Juanyi (Jenny) and Zhao, Chen, Import Response to Exchange Rate Fluctuations: A Micro-Level Investigation (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2580225 or http://dx.doi.org/10.2139/ssrn.2580225

Yao Amber Li (Contact Author)

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

HOME PAGE: http://yaoli.people.ust.hk/

Juanyi (Jenny) Xu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Simon Fraser University (SFU)

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Chen Zhao

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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