Research On The Substitution Between Currency Revaluation And Inflation In Trade Balance

In theory, the currency appreciation and domestic inflation can reduce exports. In recent years, the appreciation of RMB and price rising exist at the same time. However, China's trade surplus does not seem to have a tendency to reduce. Whether the changes of RMB exchange rate and price have impacts on China's trade balance or not, we try to use the qualitative analysis and quantitative analysis means to discuss the relationship between them.In this thesis, we first introduced the relationship between exchange rate and price in the trade balance adjustment theory. And then, we use cointegration tests, error correction model and the autoregressive distributed lag model to discuss China's bilateral trade with her major trading partners in eight countries, and China's total trade balance. The eight major trading partners are United States, Japan, Korea, Hong Kong, Britain, Russia, Canada and India. The paper analyses the relationships of the trade balance of China, the RMB exchange rate and inflation at home and abroad based on empirical test. Empirical results show that: the bilateral exchange rate of RMB appreciation and the Consumer Price Index up in China are able to reduce the bilateral trade surplus in China and South Korea, Canada, India and United Kingdom bilateral samples. These are in line with the theoretical analysis. In other words, there are substitution effects between the appreciation of RMB and China's inflation in China's bilateral trade balance adjustment with the three countries. The empirical analysis between China and the rest five countries is not uniform. There is a long-term co-integration in the China's total trade balance, nominal effective exchange rate of RMB, China's Consumer Price Index. However, the nominal effective exchange rate of RMB promoted the trade surplus, while the rising of the Consumer Price Index reduced the trade surplus.RMB appreciation and domestic inflation in China reduce the trade surplus between China's bilateral trade balance with South Korea, Canada, India and United Kingdom.This shows that the appreciation of RMB and inflation have a certain impact on the trade balance. However, in order to reduce China's trade surplus, it is not feasible, if we only rely on the sharp appreciation of RMB or significant increases in inflation. China should maintain a steady appreciation of the RMB and moderate inflation, and take a series of comprehensive measures. China's steady appreciation of the RMB should be taken and the policy of moderate inflation, as well as comprehensive measures more favorable.