Asset Price, the Exchange Rate, and Trade Balances in China: A Sign Restriction VAR Approach

30 Pages Posted: 17 Oct 2018

See all articles by Wongi Kim

Wongi Kim

Chonnam National University

Date Written: September 30, 2018

Abstract

Although asset price is an important factor in determining changes in external balances, no studies have investigated it from the Chinese perspective. In this study, I empirically examine the underlying driving forces of China’s trade balances, particularly the role of asset price and the real exchange rate. To this end, I estimate a sign-restricted structural vector autoregressive model with quarterly time series data for China, using the Bayesian method. The results show that changes in asset price affect China’s trade balances through private consumption and investment. Also, an appreciation of the real exchange rate tends to deteriorate trade balances in China. Furthermore, forecast error variance decomposition results indicate that changes in asset price (stock price and housing price) explain about 20% variability of trade balances, while changes in the real exchange rate can explain about 10%.

Keywords: Stock Price, Housing Price, Real Effective Exchange Rate, China Trade Balance, Sign Restriction VAR

JEL Classification: C32, F14, F41

Suggested Citation

Kim, Wongi, Asset Price, the Exchange Rate, and Trade Balances in China: A Sign Restriction VAR Approach (September 30, 2018). East Asian Economic Review Vol. 22, No. 3 (September 2018) 371-400, DOI: http://dx.doi.org/10.11644/KIEP.EAER.2018.22.3.348, Available at SSRN: https://ssrn.com/abstract=3264599 or http://dx.doi.org/10.2139/ssrn.3264599

Wongi Kim (Contact Author)

Chonnam National University ( email )

300 Yongbong-dong
Gwangju, Jeonnam
Korea, Republic of (South Korea)

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