This paper proposes a structural VAR model which extends the frameworks of Hoffmaister and Rolduf3s (2001) and Prasad (1999). The model is then used to analyse the sources of Chinau2019s trade balance fluctuations in the period of 1985u20132000. Efforts are made to distinguish the forces which underlie the long-run trend in trade balance from those with transitory impacts. The effects of four types of shock are examinedu2014the foreign supply shock, the domestic supply shock, the relative demand shock, and the nominal shock. Among other findings, two emerge as important. First, the movements in Chinau2019s trade are largely the result of real shocks. Second, the Renminbi is undervalued, yet changes in the exchange rate bear little on the trade balance. Therefore, monetary measures would not suffice to redress Chinau2019s trade u2018imbalanceu2019. u2013 China ; trade balance ; real exchange rate ; structural VAR ; Law of One Price
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