HKUST IEMS Working Papers No. 2015-27
This paper presents theory and evidence on firms' import responses to exchange rate fluctuations using disaggregated Chinese imports data. The paper develops a heterogeneous-firm trade model that predicts import responses at both extensive and intensive margins as well as the more profound adjustment under ordinary trade than processing trade. Next, the paper empirically investigates import responses to exchange rate fluctuations at extensive and intensive margins in both the short run and the long run, and confirms the model predictions. We also find variations among import responses under different exchange rate regimes (including fixed exchange rate, expected appreciation, and confirmed appreciation).
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