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The trade balance and the real exchange rate

Author

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  • Enisse Kharroubi

Abstract

Globalisation has affected the relationship between the trade balance and the real exchange rate in two ways. On the one hand, the growth of trade taking place within industries makes the trade balance more sensitive to real exchange movements. On the other hand, a higher degree of vertical specialisation and more global supply chains act to reduce this sensitivity. The relative importance of these two effects varies across countries. According to the estimates presented in this article, changes in the real exchange rate could play a larger role in curbing the US trade deficit than in reducing the Chinese trade surplus. This confirms that real exchange rate adjustment is only part of the solution for global rebalancing, and needs to be accompanied by other policy actions.

Suggested Citation

  • Enisse Kharroubi, 2011. "The trade balance and the real exchange rate," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:1109e
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    References listed on IDEAS

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    1. Elhanan Helpman & Paul Krugman, 1987. "Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258087x, April.
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    3. Yin-Wong Cheung & Menzie Chinn & Eiji Fujii, 2009. "Pitfalls in Measuring Exchange Rate Misalignment," Open Economies Review, Springer, vol. 20(2), pages 183-206, April.
    4. World Bank, 2009. "The World Bank Annual Report 2009," World Bank Publications - Books, The World Bank Group, number 4354.
    5. Meng, Bo & Yamano, Norihiko & Webb, Colin, 2010. "Vertical specialisation indicator based on supply-driven input-output model," IDE Discussion Papers 270, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    6. World Bank, 2009. "The World Bank Annual Report 2009," World Bank Publications - Books, The World Bank Group, number 4356.
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    Citations

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    Cited by:

    1. Martin Mandel & Tran Van Quang, 2017. "Empirická verifikace exportní funkce s akcentem na vliv kurzu české koruny k euru [An Empirical Verification of Export Function Focused on the Impact of EUR/CZK Exchange Rate]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(6), pages 649-668.
    2. Filip Pastucha, 2021. "Analysis of the export and import function of the Czech Republic: aggregate and structural view [Analýza exportní a importní funkce ČR - agregovaný a strukturální pohled]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2021(2), pages 5-26.
    3. Carlos A. Ibarra, 2014. "Trade, investment, and capital flows:Mexico's macroeconomic adjustment to the Great Recession," Working Paper Series Sobre México 2014002, Sobre México. Temas en economía.
    4. Erdal Ozmen & Duygu Yolcu-Karadam, 2014. "Structural Change in Turkish External Trade: Evidence from BEC Sectors," ERC Working Papers 1413, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    5. Joscha Beckmann & Mariarosaria Comunale, 2020. "Exchange rate fluctuations and the financial channel in emerging economies," Bank of Lithuania Working Paper Series 83, Bank of Lithuania.
    6. repec:zbw:bofitp:2021_011 is not listed on IDEAS
    7. Jonathan Kearns & Nikhil Patel, 2016. "Does the financial channel of exchange rates offset the trade channel?," BIS Quarterly Review, Bank for International Settlements, December.
    8. Joscha Beckmann & Mariarosaria Comunale, 2020. "Exchange rate fluctuations and the financial channel in emerging economies," Bank of Lithuania Working Paper Series 83, Bank of Lithuania.
    9. Rebecca Neumann & Saleh S. Tabrizy, 2021. "Exchange Rates and Trade Balances: Effects of Intra-Industry Trade and Vertical Specialization," Open Economies Review, Springer, vol. 32(3), pages 613-647, July.
    10. Sagnik Bagchi & Surajit Bhattacharyya, 2019. "Country-Specific Determinants of Intra-Industry Trade in India," Foreign Trade Review, , vol. 54(3), pages 129-158, August.
    11. repec:prg:jnlcfu:v:2021:y:2021:i:2:id:560 is not listed on IDEAS
    12. repec:ags:aaea22:335683 is not listed on IDEAS

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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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