Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption

By Antonio Spilimbergo, Athanasios Vamvakidis

July 1, 2000

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Antonio Spilimbergo, and Athanasios Vamvakidis. Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption, (USA: International Monetary Fund, 2000) accessed October 7, 2024

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.

Subject: 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

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/128
Stock No:

WPIEA1282000
ISBN:

9781451855043
ISSN:

1018-5941

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