RMB Exchange Rate, Domestic and Foreign Economic Performance and China’s Trade Balance:an Empirical Study Based on Markov Regime Switching VAR Model

This paper first decomposes the trade balance into general trade and processing trade,then uses MSIH(2)-VARX(1) model to estimate the ef-fects of RMB exchange rate and domestic and foreign economic performance on China’s trade balance under two regimes of exchange rate appreciation pressure and depreciation pressure from 1994 to 2010.The empirical results indicate that: from the third quarter of 1994 to 1998,and from the fourth quarter of 2004 to 2008,there was appreciation pressure in the RMB effective exchange rate.From 1999 to 2004,and from 2004 to 2010,there was depreciation pressure in the RMB effective exchange rate.The effects of financial crisis in 2008 on trade bal-ance are larger than financial crisis in 1998.There’s no J curve effect in gener-al trade balance,and J curve effect exists in processing trade balance,but over-all the RMB exchange rate may not affect the trade balance.There’re no signifi-cant effects of domestic and foreign economic performance on trade balance,but an innovation in RMB exchange rate may cause the negative response of China’ s economic growth.