Yuan-Dollar Real Exchange Rate and the U.S. Real Trade Balance with China: Long-Run Cointegration and Short-Run Dynamic Analysis

ABSTRACT This article examines the impact of the yuan-dollar real exchange rate on the U.S. trade deficit with China in the long run as well as in the short run using a novel globalization-augmented empirical model. The long-run estimates are obtained using the Johansen-Juselius cointegration method along with the corresponding short-run dynamics. The longest available annual time-series data with a sample size of 45 years is utilized to conduct the empirical tests. The study finds confirmation of the long-run equilibrium and that the real yuan-dollar real exchange rate plays a strong role consistent with traditional theory. Real income and globalization played strong roles as well.