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A standard assumption in the empirical literature is that exchange rate pass‐through is both linear and symmetric. This study tests these assumptions for export and import prices in the G7 economies. It focuses on non‐linearities in the reaction of profit margins to exchange rate movements, which may arise from the presence of price rigidities and switching costs. Nonlinearities are characterized by augmenting a standard linear model with polynomial functions of the exchange rate and with interactive dummy variables. The results suggest that nonlinearities and especially asymmetries cannot be ignored, although their magnitude varies noticeably across countries.

This paper introduces a new methodology for the estimation of income trade elasticities based on an import intensity-adjusted measure of aggregate demand. It provides an empirical illustration of this new approach for a panel of 18 OECD countries, paying particular attention to the 2008-09 Great Trade Collapse, which standard empirical trade models fail to account for. In this paper, we argue that the composition of demand plays a key role in the collapse of trade during crises because of a relatively bigger fall in the most import-intensive categories of expenditure (especially investment, but also private consumption), which has a large downward impact on the quantity of imports from the rest of the world. In addition, the fragmentation of production implies high import content of exports and, in turn, strongly synchronized trade ‡uctuations across countries. We provide evidence in favor of these factors based on the analysis of the new OECD input-output tables and building on a stylized theoretical model. Importantly, we show that our new intensityweighted measure of demand outperforms alternative measures, during crises but also in normal times, providing import elasticities of demand that are much less volatile across the cycle. JEL Codes: F10, F15, F17.

No abstract

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This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=1282043.

In 2005 all ECB publications will feature a motif taken from the €50 banknote. WO R K I N G PA P E R S E R I E S N O. 5 0 9 / A U G U S T 2 0 0 5 C O N T E N T S Abstract 4Non-technical summary 5

The authors estimate gravity models using a large panel of bilateral trade flows across 61 countries between 1980 and 2003, which are applied as a benchmark for the integration of Central and South Eastern European countries with the euro area. They show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results. The results suggest that trade integration between most new EU member states and the euro area is already relatively advanced, while the remaining Central and Eastern European countries have significant scope to strengthen trade links with the euro area. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd.