Demand for Value Added and Value-Added Exchange Rates
September 8, 2015
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Summary
We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
Subject: Competition, Demand elasticity, Economic theory, Exchange rates, Exports, Financial markets, Foreign exchange, International trade, Real effective exchange rates
Keywords: Armington-REER change, Armington-REER framework, Armington-REER index, Asia and Pacific, changes in the Armington-REER, Competition, Demand elasticity, demand system, Exchange rates, Exports, Global, global supply chains, production elasticity, Real effective exchange rate, Real effective exchange rates, real value, REER weight, value-added REER, weight difference, WP
Pages:
70
Volume:
2015
DOI:
Issue:
199
Series:
Working Paper No. 2015/199
Stock No:
WPIEA2015199
ISBN:
9781513595047
ISSN:
1018-5941
