Can financial marketization mitigate the negative effect of exchange rate fluctuations on exports? Evidence from Chinese regions

Abstract

A lot of research has been undertaken on the relationship between exchange rate fluctuation and export. On this basis, this paper considers the moderating effect of financial marketization on the relationship between them, and shifts the research perspective to the provincial level. Using quarterly inter-provincial panel data from 2006 to 2017, this paper focuses on whether financial marketization can weaken the negative effect of exchange rate volatility on export. The conclusions are as follows: at the national level, the depreciation of the inter provincial effective exchange rate in the current period can promote export growth in the next period, while exchange rate volatility will inhibit the next period exports. Financial marketization can mitigate the negative effect of exchange rate volatility on exports. We do however find regional differences in the intensity of these relationships. This study provides empirical evidence for accelerating the reform of financial marketization, steadily promoting the formation mechanism of RMB exchange rate and balancing the development of regional trade.