The nexus between real exchange rate misalignment and US–China trade: evidence from post RMB regimes

Abstract

This paper investigates the impact of real exchange rate volatility and misalignment on exports and imports between China and the United States. Our empirical analysis used the quarterly time series data over the 1994Q:1–2019Q:4 period. We used the ARDL-bound testing approach for the short- and long-run relationship. The empirical results reveal that China’s real exchange rate volatility and misalignment significantly impact China’s real exports and imports over the sample period. In the short-run, the relationship between real exchange rate misalignments and China’s exports is positive, whereas negative with imports from the United States. In the long run, the real exchange rate misalignment positively affects exports and negatively affects imports. The evidence suggests that both higher real exchange rate volatility and misalignment directly affect the relative price of goods and encourage China exports to United States.