Would Currency Appreciation Reduce the Trade Surplus

We build a small open economy model with the financial accelerator mech- anism to investigate how currency appreciation affects trade imbalances. Con- trary to speculation that currency appreciation significantly reduces trade sur- pluses, our analysis suggests that currency appreciation would lead to a further trade surplus increase and a reduction in output for countries holding a large amount of foreign assets and importing a high proportion of non-consumption goods, such as China.