The Effects Of Bilateral Exchange Rate Volatility On The Bilateral Trade And Economic Volatility In East Asia

Since the beginning of the 20th century 60s, represented by Japan and also the Asia's"four little dragons", the economy of the East Asia has been developed rapidly. This is the so called"East Asian Miracle". Stiglitz(2003)emphasize the importance of trade when introduced the reasons that contribute to the"East Asian Miracle". Except China and Indonesia, the domestic market is relatively small for most of the East Asian countries. That is why foreign markets is so important for these countries. With the expansion of trade scale, the policy and structure of trade is also changing constantly in these countries. Especially after the 90's 20th century, share of internal trade between East Asian countries increased year by year. At the same time a"triangular trade"is forming, raw materials imported from Japan and the"four small dragons"assembled in China then exported to the U.S. market. In this process, China is the hub. Therefore, East Asian intra-trade becomes a hot spot, and people pay more and more attention about it. In so many factors that affect trade, exchange rate volatility is an important one. The core question is whether the increasing of exchange rate volatility will inhibit the trade or not. At the same time, size of domestic markets in most countries are small but will high trade dependency, import and export trade volume takes large part of their GDP. Therefore analysis of the effect of bilateral exchange rate volatility between bilateral trade and economic volatility in East Asia has very important practical significance. Although scholars did lots of empirical analysis about the effect that exchange rate volatility may impact the trade and economy, they got different results because of different sample of objects, different sample time and different calculation methods. These analysis mainly concentrated on the developed countries, less for the developing countries. For these reasons, this paper selects Korea and Japan which have a large bilateral trade scale for study to analysis the impact of bilateral exchange rate on trade and economy. Through the analysis this paper presents some recommendations for how to reduce negative effects of the bilateral exchange rate volatility and it is very important for promoting the internal trade scale in East Asia and developing the economy of East Asian countries.This paper is divided into five parts:The first part is introduction. In this section it introduces the background and why to choose this topic. It also gives a brief explanation of what this paper will discuss and points out the deficiencies and innovation.The second part is mainly a theoretical analysis about the relationship between the exchange rate volatility and trade flows. Flexible analytical methods is used and set up random walk models, using equation residuals to express the degree of deviation from the equilibrium exchange rate, that is, the exchange rate volatility. Finally we got the relationship between trade balance and exchange rate volatility. Assuming other conditions remain unchanged, when showing an upward trend in the real exchange rate volatility, trade scale expands; when showing a downward trend of volatility, trade scale narrows. Then it introduced the East Asian intra-trade status and the arrangements of exchange rate system in East Asian countries. It selects Korea and Japan which have a significant scale of bilateral trade between them as the study model for the empirical analysis and focuses on the two countries'exchange rate system arrangements.The third part is empirical analysis on the bilateral exchange rate volatility and internal volume of bilateral trade in East Asia. This part mainly selects Korea and Japan as the research objects. Based on the theoretical analysis, use measurement tools for empirical analysis, shows that: for Korea, in the sample interval, the China-Korea bilateral exchange rate volatility will inhibit the scale of China-Korea bilateral trade. For the imports of Korea, China-Korea bilateral exchange rate volatility will inhibit the imports of Korea, while the income level of Korea will promote the imports of Korea; for the exports of Korea, China-Korea bilateral exchange rate volatility will inhibit the export of Korea, while the income level of China will also promote the Korea's exports. For Japan, the China-Japan bilateral exchange rate volatility plays a weak role in promoting the scale of bilateral trade. For the imports of Japan, the China-Japan bilateral exchange rate volatility will promote the imports of Japan a little, compared to the income level of Japan which promotes the imports of Japan significantly. For the exports of Japan, the China-Japan bilateral exchange rate volatility promotes the exports of Japan weakly, China's income level plays an important role in promoting the exports of Japan. The fourth part mainly analysis the relationship between bilateral exchange rate volatility and the economic volatility in East Asia. This part select China, Japan and Korea as the research objects, empirical analysis shows that: bilateral exchange rate volatility has a greater impact on the countries which highly dependence on the foreign trade. Neither the bilateral exchange rate between China and Korea nor the bilateral exchange rate between China and Japan show a not very significant impact on China's economic volatility. Bilateral exchange rate volatility between China and Korea show more significant impaction to the economic volatility of Korea; as the same, bilateral exchange rate volatility between China and Japan show more significant impaction to the economic volatility of Japan. This is mainly because foreign trade in Japan and Korea account for more proportion in GDP, Japan and Korea are lack of resource and the foreign trade dependence is also greater.The fifth part is conclusions and policy recommendations based on the analysis above. Through the analysis above we can found that bilateral exchange rate volatility have a certain impact on the economic volatility. About the bilateral exchange rate volatility on the bilateral trade, we can't draw a consistent conclusion, and bilateral exchange rate volatility show greater influence in countries with higher foreign trade dependent degrees. Therefore, to reduce the negative impact of exchange rate volatility and to prevent the increase of economic volatility caused by exchange rate volatility has a very important practical significance for promoting stable and rapid development in East Asian countries. Finally, two proposals are made on the analysis above: 1. Improve regional cooperation and strengthen the exchange rate monetary system. 2. Set up East Asia free trade zone to promote the economic integration of East Asia.