Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade
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Summary:
This paper theoretically and empirically investigates export sensitivity to exchange rates in the context of intra-industry trade (IIT). It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented suggests the gap in production costs between two countries has an influence on IIT as well. Industry-level pane regressions of thirty-eight trading pairs provide strong empirical support for the idea that the exchange rate sensitivity of exports declines in concert with the extent of ITT. An obvious policy implication is that the effectiveness of exchange rates in addressing trade imbalances will diminish as the extent of IIT increases.
Series:
Working Paper No. 2008/134
Subject:
Currencies Exchange rates Exports Real exchange rates Trade balance
English
Publication Date:
May 1, 2008
ISBN/ISSN:
9781451869934/1018-5941
Stock No:
WPIEA2008134
Pages:
20
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