Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption

Author/Editor:

Antonio Spilimbergo ; Athanasios Vamvakidis

Publication Date:

July 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The real effective exchange rate is an aggregation of several bilateral real exchange rates with respect to other countries. The aggregation is usually done under the assumption of constant elasticity of substitution (CES) between products from different countries. We investigate the validity of this assumption by estimating manufacturing export equations for 56 countries over 26 years. We find that the hypothesis of CES is rejected and that the export equations that contain two real effective exchange rates (one in relation to OECD countries and one in relation to non-OECD countries) perform on average considerably better than the traditional ones.

Series:

Working Paper No. 00/128

Subject:

English

Publication Date:

July 1, 2000

ISBN/ISSN:

9781451855043/1018-5941

Stock No:

WPIEA1282000

Format:

Paper

Pages:

29

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