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

Abstract

The real effective exchange rate (REER) is one of the most cited statistics in open‐economy macroeconomics. We show that the models used to compute these numbers are not rich enough to allow for the rising importance of global value chains. Moreover, because different sectors within a country participate in international production sharing at different stages, sector‐level variations are also important for determining competitiveness. Incorporating these features, we develop a framework to compute REER at both the sector and country level and apply it on intercountry input‐output tables to study the properties of the new measures.

International Trade Finance and the Cost Channel of Monetary Policy in Open Economies

“…28 Although this paper too finds estimates of elasticity to be small in line with the macro literature, these estimates could be susceptible to the downward aggregation bias discussed in Imbs and Méjean (2012), who show that when elasticities are heterogenous, aggregation leads to a downward bias. Indeed the evidence on heterogeneity of elasticities is substantial, as documented in Patel et al (2014) and Broda and Weinstein (2006) among others. The value chosen for the simulation results η = 1 is a compromise between the estimated obtained from the micro and macro literatures and is more in line with the latter.…”

The Inflexible Structure of Global Supply Chains

“…that -in their data -therefore end up being overrepresented. 3 For a similar approach, see also Patel, Wang, and Wei (2017).…”

Back on Track? A Macro-Micro Narrative of Italian Exports

“…Standard REERs, such as those employed in the analysis herein, use weights based on bilateral gross trade flows of goods and are constructed according to two key assumptions: i) countries trade only in final goods (Armington, 1969) and ii) the elasticity of substitution is constant not only for products coming from different countries, but also across different products (Spilimbergo and Vamvakidis, 2003). By using information on value added extracted from World Input-Output tables, sourced from WIOD, the most recent literature has however made progress in incorporating at least three dimensions of the rising internationalization of production processes, which question these two key assumptions, in the construction of REERs: a) as already discussed in Box B, owing to (increasing) vertical integration into trade, countries add value to different stages of the production process and therefore compete in supplying domestic value added to international markets (Bems and Johnson, 2012); b) an appreciation of a country's currency raises the international price of its final goods, but this effect may be (partially or entirely) offset by the fact that the appreciation also reduces the cost of importing intermediate goods, thereby dampening overall production costs within the country, especially for economies at the end of the production chain (Bems and Johnson, 2015), c) sectors are not identical in their interactions across borders (Patel, Wang and Wei, 2017).…”

“…In addition to input-output linkages, Patel, Wang and Wei (2017) introduce a further methodological improvement in the construction of REERs vis-à-vis the same set of trading partners considered by Fidora and Schmitz (2017) to tackle the third dimension mentioned above, therefore by accounting for sectoral heterogeneity both in the prices and in the weights employed. 1 Sectoral deflators, in particular, are derived from different entries in the WIOD tables appraised at both current and previous year prices, and are available only until 2009.…”

“…Considering however the limited geographical coverage of these more sophisticated REERs and their short time-span in the case of Patel, Wang and Wei's (2017) indicators, strong conclusions concerning Italy's price competitiveness based on these innovative measures cannot be drawn, and we therefore prefer to base our assessment on the standard and more encompassing (in terms of country coverage) REERs discussed in the main text.…”