Demand for Value Added and Value-Added Exchange Rates

Abstract

We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness. (JEL E31, F23, F31, L14)

Global Value Chains and Effective Exchange Rates at the Country‐Sector Level

“…It shows that the differences between weights that incorporate sectoral heterogeneity NOTES: The GVC-REER is our proposed measure of REER, which incorporates input-output linkages, as well as sectoral heterogeneity (in both REER weights and price indices). The VAREER corresponds to the value-added REER measure proposed in Bems and Johnson (2017), which accounts for input-output linkages but not sectoral heterogeneity. IMF-REER is a measure, which uses the IMF weighting scheme that ignores both input-output linkages and sectoral heterogeneity.…”

“…GVC-REER and Q-REER are measures proposed in this paper. VAREER corresponds to the measure proposed in Bems and Johnson (2017) (under uniform elasticity), IMF-REER is a measure that uses IMF weights and country-level price indices, and BIS-REER is the measure published by BIS. The sample includes 11 emerging market economies in the WIODs, from 1995 to 2009 (annual).…”

“…27 We compare elasticities of the lefthand side variable with respect to different measures of the exchange rate (E xrate i,t ). The two measures proposed int his paper (GVC-REER and Q-REER) are compared with the VAREER measure of Bems and Johnson (2017), an Armington-CES REER computed in the spirit of Bems and Johnson (2017), and the BIS REER measure. In the benchmark regressions, we use one variable in the controls i,t vector, namely the bilateral nominal exchange rate against the U.S. dollar.…”

Global value chain and its impact on the linkage between exchange rate and export: Cases of China, Japan and Korea

“…One approach to reflect cross-border linkages across countries in real exchange rate is to modify the standard REER formula. Bems andJohnson (2012, 2015) and Bayoumi, Saito, and Turunen (2013) derive a new REER formula to incorporate the effect of GVCs. They assume that production structure takes the nested constant elasticity of substitution form which separates the production of domestic and foreign value added used in domestic production.…”

“…The revised formula, proposed by Bayoumi et al (2013), does not shed light on value-added trade patterns directly. Thus we use the formula proposed by Bems andJohnson (2012, 2015) to incorporate the effect of GVCs into the REER formula in this study. Considering that sectoral heterogeneity causes significant bias in aggregate real exchange rate measures, we measure industry-level REER for China, Japan and Korea.…”