An Empirical Study Of Sino-Germany Bilateral Trade J-Curve Effect

Exchange rate is the soul of international finance. It plays a more and more important role in the inside and outside equilibration and reliable development of national economy, even in the movement of worldwide economy. As a significant variety of economical lever, exchange rate is one of the important aspects, which influences a country or a region's Import and Export development. Therefore, the relation between exchange rate and trade balance has always been widely researched as a major subject in the international economics. Meanwhile, it has attracted an intensive attention from every country all over the world.Due to lag structure, currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resembles the letter J, hence the J-Curve phenomenon. Since its introduction by Magee in 1973, a large number of studies have attempted to test the phenomenon using different techniques and different model specifications. This paper first reviews these studies, and we believe that: (1) No matter what type of model and data (aggregate versus bilateral) used by researchers, the general consensus is that the short-run response of the trade balance to currency depreciation does not follow any specific pattern. The results are country specific. (2) As far as the long-run effects of depreciation are concerned, models that rely on bilateral trade data yield more outcomes supporting the positive long-run relation between exchange rate and trade balance as compared to aggregate data.After that, based on the microeconomics theory, this paper analyzes three periods after the devaluation: currency contract period, pass-through period and quantity-adjustment period. Then, this paper derives the J-curve theory model from the macroeconomics angle, and it's useful for the later empirical analysis. The model combines demand factor and supply factor.Then, this paper takes the bilateral trade between China and Germany as an example, analyzes the changing bilateral exchange rate's impact on trade balance. We find that there is a J-curve for the bilateral trade between China and Germany. Through constructing the vector including trade ratio, real exchange rate, China's industry production, and Germany's industry production, we establish the vector error correct model, and induce generalized impulse response function to plot the J-curve. The results suggest that trade balance deteriorates in two months after devaluation, then improves gradually. The trade balance is inclined to be stable, but it doesn't overpass the level before devaluation. This is due to two reasons as follows: (1) China is deficit in Sino-Germany trade for a long time; (2) Most of China's trade contracts are signed on foreign currency.At last, based on the empirical results, we conclude this paper, and give the policy suggestions. This paper believe that: the country should accelerate the reform of Renminbi exchange rate, and improve the mechanism of foreign currency market. On the other hand, enterprises should enforce interior management, and adjust products' structure to adapt to the new situation of Renminbi's appreciation.