The Role of Exchange Rates in Korea’s Commodity Trade with China

Gab-Je Jo

doi:10.11644/KIEP.JEAI.2010.14.2.218

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East Asian Economic Review Vol. 14, No. 2, 2010. pp. 49-76.

DOI https://dx.doi.org/10.11644/KIEP.JEAI.2010.14.2.218

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The Role of Exchange Rates in Korea’s Commodity Trade with China

Author
Gab-Je Jo	Keimyung University gabjejo@kmu.ac.kr

EAER is an open access journal distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license.

Abstract

In this paper I investigate the link between Korea’s trade balance and the exchange rate, using both aggregated and disaggregated data. Employing the bounds testing approach to cointegration, and error-correction modeling, when I use the aggregate trade balance as a dependent variable, I find no support for the J-curve in the short-run; and also find that in the long-run, the exchange rate had a significant positive impact on the trade balance. However, in both the short and the long-run, I find that the exchange rate does not play a significant role in deterIn this paper I investigate the link between Korea’s trade balance and the exchange rate, using both aggregated and disaggregated data. Employing the bounds testing approach to cointegration, and error-correction modeling, when I use the aggregate trade balance as a dependent variable, I find no support for the J-curve in the short-run; and also find that in the long-run, the exchange rate had a significant positive impact on the trade balance. However, in both the short and the long-run, I find that the exchange rate does not play a significant role in determining the bilateral trade balance between Korea and China, nor does it improve the disaggregated trade balance. This is because the exchange rate elasticity of the trade balance depends on the nature of the commodity. Especially if the commodity is an intermediate good or a raw material, the exchange rate elasticity in trade balance could be inelastic because the demand for the intermediate good is a derived demand from the final good.

JEL classification: F30, F42, F14

Keywords

Exchange Rate, Intermediate Product, Trade Balance, Elasticity, J-curve

Language

English

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