Value-Added Exchange Rates

52 Pages Posted: 27 Oct 2012

See all articles by Rudolfs Bems

Rudolfs Bems

International Monetary Fund (IMF); European Central Bank (ECB)

Robert C. Johnson

University of Notre Dame - Department of Economics

Date Written: October 2012

Abstract

This paper updates the conceptual foundations for measuring real effective exchange rates (REERs) to allow for vertical specialization in trade. We derive a value-added REER describing how demand for the value added that a country produces changes as the price of its value added changes relative to competitors. We then compute this index for 42 countries from 1970-2009 using trade measured in value added terms and GDP deflators. There are substantial differences between value-added and conventional REERs. For example, China's value-added REER appreciated by 20 percentage points more than the conventional REER from 2000-2009. These differences are driven mainly by the theory-motivated shift in prices used to construct the value-added REER, not changes in bilateral weights.

Suggested Citation

Bems, Rudolfs and Johnson, Robert C., Value-Added Exchange Rates (October 2012). NBER Working Paper No. w18498. Available at SSRN: https://ssrn.com/abstract=2167601

Rudolfs Bems (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Robert C. Johnson

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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