Effects of RMB Interest Rate and Exchange Rate Adjustment on Trade Balance

This paper studies the impacts of RMB interest rate and exchange rate adjustment on China's trade balance using VEC model. Based on cost decomposition method, pricing-to-market and trade equilibrium equation, we observed that trade balance is negatively related to exchange rate, relative national income, relative interest rate, relative wage and relative price of inputs. RMB appreciates had "Inverse J-curve effect" on trade balance, and the rise of RMB's relative interest rate would reduce trade balance.