Does the central bank's intervention benefit trade balance? Empirical evidence from China

Abstract

This paper employs the intervention indices measured from the modified Weymark (1997) model and modified trade models to evaluate the role of China's intervention behavior in the trade balances with its four major trade partners. In our constructed trade models, the intervention effects comprise direct and interactive phases, and their overall effects are diverse. Empirical results show that intervention actions actually create the largest trade advantage for China in the China–Japan case followed by the China–US case creating the next largest trade advantage for China. However, the trade balance is worsened in the China-European Unit case and in the China–Taiwan case. Considering the J-curve effect and the negative interactive effect in the China-European Unit case, the rate of the Chinese renminbi against the euro is not an appropriate intervention object for China.