Demand for Value Added and Value-Added Exchange Rates

ByRudolfs Bems, Robert C. Johnson

September 8, 2015

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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

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:
https://doi.org/10.5089/9781513595047.001
Issue:
199
Series:
Working Paper No. 2015/199
Stock No:
WPIEA2015199
ISBN:
9781513595047
ISSN:
1018-5941

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