China's Share of US Imports and Exchange Rate Pass‐through to US Import Prices

Abstract

AbstractThe present paper investigates the effect of China's share of US imports on the aggregate‐level exchange rate pass‐through to US import prices over the period from January 1999 to December 2008. The paper also focuses on the post‐reform period, after 2005, allowing greater flexibility of the RMB to explore the change in the role of the Chinese import share in determining the trend in the US exchange rate pass‐through. Evidence reveals that China's share of US imports has a negative effect on the exchange rate pass‐through. However, this negative effect has been moderated to a negligible level since China's exchange rate reform. An important implication is that the exchange rate flexibility of the RMB has been raised to a significant level may no longer cause distortion in the US competitive environment and prevent the USA from adjusting current accounts.