Estimating exchange rate elasticity of china’s manufacturing export price: from the perspective of vertical specialization
【Abstract】What effects can adjusting the exchange rate (ER) have on China’s foreign trade? Existing literature suggests that the ER elasticity of China’s manufacturing export pricesis very small, and thus adjusting the ER has little impact on China’s foreign trade. But the ER adjustment policy, to some extent, can indeed affect the competitiveness of exporting products. Theoretical studies contradict the reality, and why? From the perspective of China’s provinces’ vertical specialization, an explanation is given to this question: vertical specialization ratio of China’s provinces exerts greater positive effect on the ER elasticity of China’s manufacturing export prices. With the rise of vertical specialization ratio, the coefficient of ER elasticity of each province’s manufacturing export prices will increase. Compared with the existing literature on China without considering the impact of vertical specialization ratio, this study considers this factor and finds that the coefficient of ER elasticity of China’s each province’s export prices is much larger than the estimated results in the literature. The conclusions of the robust tests on samples of differentiated products, samples of different modes of transport and the samples that use vertical specialization ratios of 11 manufacturing products exporting from China to EU15 are stable.
【Keywords】 export price; exchange rate elasticity; exchange rate pass-through effect; vertical specialization;
(Translated by ZHANG Yan)
. ①If φ = 0, this denotes Producer Currency Pricing. Namely, the goods price is determined on the basis of exporting country’s (or region’s) currency, and it is sticky. Then ER pass-through effect of export price is complete, because the export price in domestic currency will not be affected by ER fluctuation, while the market price of exporting destination will change with ER fluctuation. However, it has been extensively and empirically proved that ER pass-through effect cannot be complete, exporting enterprises’ export price changes with ER fluctuation, while the market price at exporting destination remains unchanged. This is known as the Local Currency Pricing. [^Back]
. ①Please refer to Fan and Cheng’s  study for similar estimation method. [^Back]
. ②Koopmanet et al. suggests decomposing general input-output table, and constructing one that can reflect the characteristics of the processing trade (named as KWW method for short). Such table can reflect the type of processing trade and theoretically ensure satisfaction of constraints on resource flow. The vss of processing trade and general trade of each sector in any country can be estimated according to the input-output table decomposed with KWW method, while the total vertical specialization ratio is to take weighted average of the processing trade and general trade (and the weights are their respective ratio in total trade). Then Dean et al. revises the formula based on the KWW method (and the revised one is referred to as DFW method). [^Back]
. ①The importing and exporting commodities of various sectors are shown in China's input-output table (2007) issued by National Bureau of Statistics of China. [^Back]
. ①Due to limited space, the empirical results that differentiate samples consisting of durable goods and non-durable goods, based on different trade manners, and different export enterprise ownership types are all ignored, and those who are interested can directly request the data from the authors. [^Back]
. ①Gross trade accounting method eliminates the excessive dependence on input-output table. The data of 35 sectors from 40 countries (1995–2011) cited from WOID database can help to calculate added-value of trade at national level and value added of trade between upper stream or downstream sectors before or after export. In this way, the composition and structure of each country’s added value is analyzed and the status of country in bilateral or multilateral trade and the global value chain is clearly measured. Koopman et al. perfects this accounting method, and accordingly analyzes each country’s participation degree of industrial chain and added value, on the basis of combining micro trade data from customs and transnational input-output table (such as GTAP database). For more details, please refer to Koopman et al.’s paper . [^Back]
. ①The 11 sectors of manufacturing industries shown in WIOD database include food, beverages and tobacco products (C3), textile and its products (C4), leather and footwear (C5), wood, wood products and cork products (C6), pulp, paper and paper products, printing and publishing (C7), coke, refining petroleum products and nuclear fuel (C8), chemicals (C9), other non-metallic mineral products (C11), metals and their products (C12), machinery and electronic equipment (C13), and electrical and optoelectronic devices (C14). [^Back]
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