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As China’s economy grows and vertical specialisation rises in Asia, the question of how and to what extent China influences other Asian economies through this specific trade channel is of interest to researchers. Given the high degree global value chain participation and trade integration with China, Taiwan serves as a good case to examine this question.Particularly since 2001 the Taiwanese government allowed direct trade and investment in China, and this transition provides a natural experiment to investigate the importance of Chinese influence on Taiwan.
The study presented in this seminar adopts a VAR model with block exogeneity, which considers the US GDP and China’s GDP as foreign output disturbances, to investigate the question. The paper finds that China’s influence is increasing. After 2001, China is influential on the fluctuations in Taiwan’s GDP and its real exchange rate, while the US dominates the decision of Taiwan’s central bank. China’s positive shock results in a positive response of Taiwan’s GDP while causing an adverse effect on Taiwan’s real exchange rate. Regarding vertical specialisation, the results show that China’s economic growth stimulates the demand for intermediates from its neighbours, while these intermediates producers provide their goods at lower prices.
Kai-Yun Tsai is a PhD candidate in Economics at CAMA in the Crawford School of Public Policy. Her current research focuses on international transmission of economic disturbance through trade linkage and competition over ICT goods in East Asia’s supply chains.
The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers and reputable visitors to showcase their work.