The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 8535Global value chain participation affects the exchange rate pass-through to export prices and export volumes. The paper develops a partial equilibrium model of international trade with cross-border production and shows that higher participation in global value chains reduces the elasticities. Specifically, a higher share of foreign value added in exports reduces the exchange rate pass-through to export prices and export volumes. A greater share of exports that return as imports also reduces the responsiveness of export volumes to changes in bilateral exchange rates. Finally, exports of inputs that are further re-exported increase the responsiveness to the trading partner's effective exchange rate. Using a novel sector-level panel dataset with 40 countries, the analysis tests and finds strong empirical support for the theoretical predictions. The paper further shows that some sectors in some countries can even experience a decline in gross exports when their currency depreciates. This paper is a product of the Office of the Chief Economist, Middle East and North Africa Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.

Global value chain (GVC) participation affects the relationship between trade volumes and exchange rate movements. Guided by a simple theory, we show that exports react to the exchange rate between the country producing value added contained in exports and the country of final absorption for this value added. Three predictions follow: (i) a higher share of foreign value added in exports reduce the responsiveness of export volumes to exchange rate changes, (ii) a greater share of exports that returns as imports also reduce the responsiveness of export volumes and (iii) a higher share of inputs that are further reexported increase the responsiveness of exports to the trading partner's nominal effective exchange rate. Using a large origin-sector-destination level panel data set covering the period 1995-2009 and around 85% of world GDP, we find strong empirical support for these predictions. We further show that some sectors in some countries can experience a decline in gross exports when their currency depreciates.

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Quantifying the effects of trade policy in the age of 'global value chains' (GVCs) requires an enhanced analytical framework that takes the observed international input-output relations in due account. However, existing quantitative general equilibrium models generally assume that industrylevel bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This amounts to applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in available inputoutput data sets. To overcome this limitation of existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in inputoutput tables. This allows us to investigate the relation between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies.

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This paper studies the role of global input–output linkages in transmitting economic disturbances in the international economy. Our empirical results find that these links are both statistically significant and of economic importance for generating spillovers. We also provide evidence that it is not the inter‐linkages per se that matter for the international transmission but rather the presence of global hub sectors that are either large suppliers or purchasers of other sectors' inputs. When the links between these sectors and the rest of the global value chain are severed, the spillovers diminish strongly and eventually become statistically insignificant. This highlights the importance of the structure of the production network for enabling spillovers and outlines the prominent role played by hub sectors in the global economy.

Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.