Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption

IMF Working Papers, July 1, 2000

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Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption

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Bibliographic details

• Authors: Antonio Spilimbergo, Athanasios Vamvakidis
• Published: July 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451855043.001

Summary

• The paper examines the aggregation of bilateral real exchange rates into a real effective exchange rate (REER) under the constant elasticity of substitution (CES) assumption.
• The authors estimate manufacturing export equations for 56 countries over 26 years to test the validity of the CES assumption.
• Main empirical finding: the hypothesis of CES is rejected.
• Empirical result: export equations that contain two real effective exchange rates (one relative to OECD countries and one relative to non-OECD countries) perform on average considerably better than traditional single-REER specifications.

Empirical approach and scope

• Sample: 56 countries.
• Time span: 26 years.
• Sector analyzed: manufacturing exports.
• Model comparison: traditional single-REER (CES-based aggregation) versus two-REER specification (OECD and non-OECD).

Key findings

• The CES assumption underlying common REER aggregation methods is not supported by the estimated export equations.
• Using two REERs—separately for OECD and non-OECD trading partners—yields considerably better-performing export equations on average than the traditional CES-based single-REER approach.

Subjects and keywords (as provided)

• Subjects: Economic sectors, Exchange rates, Exports, Foreign exchange, International trade, Manufacturing, Real effective exchange rates, Real exchange rates.
• Keywords: East Asia, elasticity of substitution, equation estimate, Exchange rates, export demand equation, export equation, Exports, Foreign exchange, Manufacturing, OECD country, Real effective exchange rates, Real exchange rates, trade forecasting and simulation, utility function, WP.

Content in this bundle

• Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption - WP/00/128
  • Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption - WP/00/128 (Markdown version)
  • Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption - WP/00/128 (PDF)