Demand for Value Added and Value-Added Exchange Rates
71 Pages Posted: 13 Oct 2015
Date Written: September 2015
We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
Keywords: Real effective exchange rate, global supply chains, value, value added, elasticity, General,
JEL Classification: -;- F10, F40
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