A Study Of Regional Differences In The Output And Employment Effects Of RMB Exchange Rate Changes

The macroeconomic effect of foreign exchange rate change is a contentious yet unavoidable topic. Since 1990's, with China's economy becoming more open and the export-oriented strategy of economy development put into practice, China's foreign trade has grown rapidly and China's economy has become more reliant on international market. As a result, a large proportion of China's economy is exposed to foreign exchange risk. The change of RMB REER will influence China's foreign trade and FDI. In particular, the appreciation of RMB REER will directly weaken the competitiveness of China's products, reduce export and export-oriented FDI, and consequently influence China's output and labor demand.In an open economy, exchange rate change will influence output and employment through foreign trade, foreign investment, balance sheet effect and expectation. In China, the development of different regions is unbalanced, so that these regions differ a lot in their foreign trade scale and their ability to attract FDI. This heterogeneity across regions provides a perspective for us to study the different impact of RMB REER change on the real output and employment of different regions.Above all, this paper analyzes the long-term equilibrium relation of China's real output, real export, FDI utilization and RMB REER with co-integrated Vector Autoregression (VAR) model, and examines their short-term dynamic with Error Correction Model (ECM), Granger causality test, impulse response and other techniques. Empirical results show that there is only one long-term equilibrium relation among China's real output, real export, FDI utilization and RMB REER. The change of RMB REER has a significant negative impact on real output. In the short run, the major change in REER has a negative impact on exports, and with exports, FDI have a negative impact on actual output.Considering the unbalanced economy development across different regions, it might lead to biased empirical results and insufficient understanding of the topic if we ignore regional differences. Since regions are different in terms of economy scale and development, openness to foreign market, import and export volume and FDI inflow, we judge that the change of RMB REER will have different impact on the output and employment of different regions across China. Then, in the framework of extended production function for open economy, we build panel data models across regions regarding the respective impact of RMB REER change on the real output and employment of different regions, and use techniques for panel data analysis to test and analyze the econometric models of regional real output and employment. Empirical results show that the impact of RMB REER change on real output and employment varies significantly across regions no matter whether the region here is defined by provinces or by economic regions. If we define region by 29 provinces, municipalities directly under the Central Government and autonomous regions, the elasticity of output to exchange rate for 17 provinces is negative, while the figure for the other 12 provinces is positive. The elasticity of output to exchange rate averages -0.147 across different provinces with a standard deviation of 0.436 and a variation coefficient of -2.961. Also, among the 29 provinces, the elasticity of employment to exchange rate for 16 provinces is negative, while the figure for the other 13 provinces is positive. The elasticity of output to exchange rate averages-0.061 across different provinces with a standard deviation of 0.326 and a variation coefficient of -5.363. If we define region by four large regions-East China, Central China, West China and North-east China, the elasticity of real output to exchange rate is -0.262,-0.130,-0.321 and -0.128 respectively, and the elasticity of employment to exchange rate is -0.274,0.034,-0.130 and -0.182 respectively. If we divide China into eight economic regions, econometric results also demonstrate that the elasticity of output and employment to exchange rate varies significantly across regions. The estimate for the model of four regions shows that RMB REER appreciation will widen the economic gap between West China and East China, and will increase pressure on China's employment, especially on employment in East China.In addition, considering that exchange rate change works on output and employment mainly through foreign trade and FDI, this paper establishes econometric equations that capture the impact of RMB REER change on export, import and FDI across different regions, and empirically examines the different impact of RMB REER change on export, import and FDI for different regions. Empirical results verify the intermediary and transmission role of foreign trade and FDI. The impact of RMB REER change on export, import and FDI varies significantly across regions. In the model of 29 provinces, the elasticity of export to exchange rate for 26 provinces is negative, the figure for the other 3 is positive, and the elasticity of export to exchange rate averages -1.079 across the 29 provinces with a standard deviation of 0.815 and a variation coefficient of -0.757. The elasticity of import to exchange rate for 26 provinces is negative, the figure for the other 3 is positive, and the elasticity of import to exchange rate averages -1.618 across the 29 provinces with a standard deviation of 1.378 and a variation coefficient of -0.852. The elasticity of FDI to exchange rate for 15 provinces is negative, the figure for the other 14 is positive, and the elasticity of FDI to exchange rate averages -0.570 across the 29 provinces with a standard deviation of 2.619 and a variation coefficient of -3.804. In the model of four economic regions, the elasticity of export to exchange rate for East China, Central China, West China and North-east China is -0.726,-1.568,-1.172 and-1.093 respectively, the elasticity of import to exchange rate is -0.894,-1.910,-1.363 and-1.365 respectively, and the elasticity of FDI to foreign exchange is -0.438,-0.711,-1.328 and -0.035 respectively. The econometric results for the model of eight regions also show that the elasticity of export, import and FDI to exchange rate varies greatly across different regions. The estimate for the model of four regions shows that RMB REER change has the largest impact on the export and import of Central China and on the FDI of West China, and have small impact on the export, import and FDI of East China. Finally, we make a summary of the paper and conclude with policy suggestions.