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The Role of Exchange Rates in Korea’s Commodity Trade with China

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  • Jo, Gab-Je

    (Keimyung University)

Abstract

In this paper I investigate the link between Korea's trade balance and the exchange rate, using both aggregated and disaggregated data. Employing the bounds testing approach to cointegration, and error-correction modeling, when I use the aggregate trade balance as a dependent variable, I find no support for the J-curve in the short-run; and also find that in the long-run, the exchange rate had a significant positive impact on the trade balance. However, in both the short and the long-run, I find that the exchange rate does not play a significant role in deterIn this paper I investigate the link between Korea’s trade balance and the exchange rate, using both aggregated and disaggregated data. Employing the bounds testing approach to cointegration, and error-correction modeling, when I use the aggregate trade balance as a dependent variable, I find no support for the J-curve in the short-run; and also find that in the long-run, the exchange rate had a significant positive impact on the trade balance. However, in both the short and the long-run, I find that the exchange rate does not play a significant role in determining the bilateral trade balance between Korea and China, nor does it improve the disaggregated trade balance. This is because the exchange rate elasticity of the trade balance depends on the nature of the commodity. Especially if the commodity is an intermediate good or a raw material, the exchange rate elasticity in trade balance could be inelastic because the demand for the intermediate good is a derived demand from the final good.

Suggested Citation

  • Jo, Gab-Je, 2010. "The Role of Exchange Rates in Korea’s Commodity Trade with China," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 14(2), pages 49-76, December.
  • Handle: RePEc:ris:eaerev:0100
    DOI: 10.11644/KIEP.JEAI.2010.14.2.218
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    Keywords

    Exchange Rate; Intermediate Product; Trade Balance; Elasticity; J-curve;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F30 - International Economics - - International Finance - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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