Impact Of Exchange Rate Fluctuations On Chinese Firms’ Dual Margins

Since the breakdown of the Bretton Woods system, the discussion about the impactof exchange rate fluctuations on the import and export trade in the field of internationaltrade has not stopped.Domestically,after30years of the reform and opening-up theRMB exchange rate has experienced two structure adjustment (1994and2005).Since2005,the RMB yuan has appreciated steadly,and the exchange rate fluctuations havebeen greatly enhanced.nd dynamic export choices(enter or exit、add or drop a productand keep exporting).There is a good deal of stylized facts that the process of a country’srelatively stable export growth is also the process of firms’ different and dynamic exportchoices.Based on the above background, we must now ask how will exchange ratefluctuations affect firms’ export choices?Is it positive or negative?How will theimporter-exporter and the government avoid exchange rate risk?These issues becomethe focus of this paper.This paper surveys the literature about the effcet of exchange rate fluctuations ontrade from the theoretical and empirical level.Results show theoretical analysis is notconsistent with the conclusions,neither is empirical analysis.There has been a greatimprovement in the literatures to understand the relationship of exchange ratefluctuations and trade.However,they still have their limitations.They are more onaggregated data, but less on firm-level data.More studies base on single-product firmhypothesis,less on mutli-product firm hypothesis.But in reality, the main body ofinternational trade is mutli-product firms. It’s not appropriate to use single-product firmframework any more.Based on the newly developed firm heterogeneity theory and in a mutli-productfirm model framework,this paper aims to study the the effcet of exchange ratefluctuations on chinese firms’ dual margins.It’s a extension and expansion of the study inthe mutli-product firm model framework.Specifically, this paper is divided into seven parts:the introduction and six mainchapters.The introduction.Presents the domestic and international background、 thetheoretical and realistic significance and the innovation and the insufficiencies.Chapter1:Literature Review.Surveys the literature about the effcet of exchangerate fluctuations on trade from the theoretical and empirical level,then points out the limitations of previous research.Chapter2:Mechanism. Illustrates the influent mechanism of exchange ratefluctuations on the dual margins of chinese exporters.Chapter3:Empirical model.Establishes the empirical model of the effcet ofexchange rate fluctuations.Chapter4:Decomposes the dual margins and measure exchange rate.Refering toBernard(2009),using China customs database January2000-December2005monthlydata,this paper decomposes the dual margins of chinese firms’ export in a mutli-productfirm model framework and then analyses the dynamics of China’s exports.Comparesseveral ways to measure exchange rate and its fluctuations; then measures thefluctuations of the nominal effective exchange rate through GARCH model.Chapter5:Empirical analysis.Analyses the effect of nominal exchange ratefluctuations on chinese exporters’ margins with the co-integration model,the vector errorcorrection model,the impulse response function and the variance decompositionmeasures.Chapter6:Conclusion.The results obtained in this paper show that at the intensivelevel,exchange rate fluctuations increases the export volume;at the extensive levelexchange rate fluctuations decrease the export volume of the drop-choice and theexit-choice,and the add-choice or enter-choice makes the loss outweighs the gain.Incase of a rising exchange rate fluctuations,strategy of focusing on core competitivenessplays a more important role than strategy of diversifying markets.At last this paperindicates the contents which can be researched in the future.