Processing Trade, RMB Exchange Rate and Domestic Value-added: Theoretical and Empirical Analysis
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| Title | Processing Trade, RMB Exchange Rate and Domestic Value-added: Theoretical and Empirical Analysis
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| Author | Yu Miaojie and Cui Xiaomin |
| Organization | National School of Development, Peking University |
| Email | mjyu@nsd.pku.edu.cn，sunnylizzie@163.com |
| Key Words | Processing Trade; RMB Exchange Rate; Domestic Value-added Ratio |
| Abstract | This paper extends the theoretical model of Rodríguez-López（2011）and Kee & Tang（2013）, to analyze the effect of exchange rate on the domestic value-added ratio（DVAR）of processing firm. Exchange rate changes have two effects on processing firms’ DVARs. First, the depreciation of Home currency increases processing firms’ DVARs, through increasing export and decreasing import. Second, the depreciation of Home currency leads to an increase of export price markup, which enlarges exporters’ output and input ratio, leading to higher DVARs. This paper uses the merged data of firm-level and product-level trade data to test the relationship between processing firms’ DVARs and RMB exchange rate. The estimation results support the theoretical expectation. That is, if firm-level nominal effective exchange rate weighted by import share in the initial year increases 10 percent or Home currency depreciates 10 percent, processing firms’ DVARs would improve 0.58 percent. |
| Serial Number | WP847 |
| Time | 2015-03-27 |
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