Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade

22 Pages Posted: 1 Jul 2008

See all articles by Yoko Oguro

Yoko Oguro

affiliation not provided to SSRN

Yougesh Khatri

International Monetary Fund (IMF)

Date Written: May 2008

Abstract

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.

Keywords: Working Paper, India, Globalization, Monetary policy, Capital inflows, Economic conditions, Liquidity management

Suggested Citation

Oguro, Yoko and Khatri, Yougesh, Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade (May 2008). IMF Working Paper No. 08/134, Available at SSRN: https://ssrn.com/abstract=1153750

Yoko Oguro (Contact Author)

affiliation not provided to SSRN

Yougesh Khatri

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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