Exchange rate fluctuations and the trade balance between China and Australia: An empirical study

Abstract. This paper uses Johansen cointegration test and a vector error correction model (VEC) to analyze the relationship between the trade balance and real bilateral exchange rate among Australia and China during 1990 to 2016. This paper suggest that the fluctuations of the real exchange rate will have impacts for China and Australia in the short run, but will have little or no impacts in the long run. This is inconsistent with the findings of previous studies suggesting that there has a J-Curve effect in the long run. As to what factors in the long run have cushioned the impacts of exchange rate fluctuations on the trade relations between Australia and China, we still need to continue exploring in the future. Keywords. Bilateral real exchange rate, Trade balance, Imports, Exports, China, Australia, VEC, J-Curve, Free trade agreement, Price level, Fluctuations. JEL. F10, F14, F15.