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Regional Effects of Exchange Rate Fluctuations

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  • CHRISTOPHER L. HOUSE
  • CHRISTIAN PROEBSTING
  • LINDA L. TESAR

Abstract

We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade‐weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state‐level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross‐sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

Suggested Citation

  • Christopher L. House & Christian Proebsting & Linda L. Tesar, 2020. "Regional Effects of Exchange Rate Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 429-463, December.
  • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:s2:p:429-463
    DOI: 10.1111/jmcb.12758
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    Cited by:

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    2. Hauptmeier, Sebastian & Holm-Hadulla, Fédéric & Renault, Théodore, 2022. "Risk sharing and monetary policy transmission," Working Paper Series 2746, European Central Bank.
    3. Hasan, Syed & Shakur, Shamim & Breunig, Robert, 2021. "Exchange rates and expenditure of households with foreign-born members: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 977-997.

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    More about this item

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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