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Demand for Value Added and Value-Added Exchange Rates

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  • Mr. Rudolfs Bems
  • Robert C. Johnson

Abstract

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.

Suggested Citation

  • Mr. Rudolfs Bems & Robert C. Johnson, 2015. "Demand for Value Added and Value-Added Exchange Rates," IMF Working Papers 2015/199, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/199
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    More about this item

    Keywords

    WP; real value; Real effective exchange rate; global supply chains; Armington-REER index; value-added REER; REER weight; demand system; production elasticity; Armington-REER framework; weight difference; Armington-REER change; changes in the Armington-REER; Real effective exchange rates; Demand elasticity; Competition; Exchange rates; Exports; Global; Asia and Pacific;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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