The Changing Role of the Exchange Rate in a Globalised Economy

64 Pages Posted: 8 Oct 2008

See all articles by Filippo di Mauro

Filippo di Mauro

European Central Bank (ECB)

Rasmus Rueffer

European Central Bank (ECB)

Irina Bunda

IMF-Singapore Regional Training Institute

Date Written: September 8, 2008

Abstract

In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important crosscountry differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area.

Keywords: Globalisation, exchange rate, trade, exchange rate pass-through, valuation effects

JEL Classification: E3, F15, F31

Suggested Citation

di Mauro, Filippo and Rueffer, Rasmus and Bunda, Irina, The Changing Role of the Exchange Rate in a Globalised Economy (September 8, 2008). ECB Occasional Paper No. 94, Available at SSRN: https://ssrn.com/abstract=1144484 or http://dx.doi.org/10.2139/ssrn.1144484

Filippo Di Mauro (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Rasmus Rueffer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7087 (Phone)
+49 69 1344 6353 (Fax)

Irina Bunda

IMF-Singapore Regional Training Institute ( email )

10 Shenton Way
MAS Building #14-03
Singapore, Singapore 079117
Singapore

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