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

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  • Yoko Oguro
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    Abstract

    This paper adds to the literature that suggests that exports become less sensitive to exchange rate movements under certain circumstances. Focusing on the industry-specific sensitivity of export quantities to exchange rates in the context of intra-industry trade (IIT), this paper theoretically and empirically investigates this relationship. The model presented shows that the extent of bilateral IIT is higher the lower the elasticity of substitution between differentiated products and/or the smaller the gap in production costs between two countries. The empirical analysis investigates cross-country industry-panels for the bilateral trade of eight East Asian countries, Japan, and the United States with the EU, Asia, Japan, and North America. The results confirm that the sensitivity of export quantities to exchange rates declines as the extent of IIT increases. The policy implication of the results is that exchange rate revaluations become a less powerful tool to redress trade imbalances when substantial IIT exists.

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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd10-167.pdf
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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd10-167.

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    Date of creation: Feb 2011
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    Handle: RePEc:hst:ghsdps:gd10-167

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    Keywords: trade; exchange rates; intra-industry trade; product differentiation;

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    1. Lionel Fontagné & Michaël Freudenberg & Nicolas Peridy, 1997. "Trade Patterns Inside the Single Market," Working Papers 1997-07, CEPII research center.
    2. Willem Thorbecke, 2011. "The Effect of Exchange Rate Changes on Trade in East Asia," Finance Working Papers 23274, East Asian Bureau of Economic Research.
    3. Fukao, Kyoji & Ishido, Hikari & Ito, Keiko, 2003. "Vertical Intra-Industry Trade and Foreign Direct Investment in East Asia," Discussion Paper Series a434, Institute of Economic Research, Hitotsubashi University.
    4. Breuer, Janice Boucher & Clements, Leianne A., 2003. "The commodity composition of US-Japanese trade and the yen/dollar real exchange rate," Japan and the World Economy, Elsevier, vol. 15(3), pages 307-330, August.
    5. Nadenichek, Jon, 2000. "The Japan-US trade imbalance: a real business cycle perspective," Japan and the World Economy, Elsevier, vol. 12(3), pages 255-271, September.
    6. Yoko Oguro & Kyoji Fukao & Yougesh Khatri, 2008. "Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade," IMF Working Papers 08/134, International Monetary Fund.
    7. Bahmani-Oskooee, Mohsen & Goswami, Gour Gobinda, 2004. "Exchange rate sensitivity of Japan's bilateral trade flows," Japan and the World Economy, Elsevier, vol. 16(1), pages 1-15, January.
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