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Demand for Value Added and Value-Added Exchange Rates

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  • Rudolfs Bems
  • Robert C. Johnson

Abstract

We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness.

Suggested Citation

  • Rudolfs Bems & Robert C. Johnson, 2017. "Demand for Value Added and Value-Added Exchange Rates," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 45-90, October.
  • Handle: RePEc:aea:aejmac:v:9:y:2017:i:4:p:45-90
    Note: DOI: 10.1257/mac.20150216
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    References listed on IDEAS

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    7. Nikhil Patel & Zhi Wang & Shang-Jin Wei, 2014. "Global Value Chains and Effective Exchange Rates at the Country-Sector Level," NBER Working Papers 20236, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Alberto Felettigh & Claire Giordano, 2018. "Rethinking prices and markets underlying price-competitiveness indicators," Questioni di Economia e Finanza (Occasional Papers) 447, Bank of Italy, Economic Research and International Relations Area.
    2. Comunale, Mariarosaria, 2017. "Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in EU," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 350-370.
    3. Byron Gangnes & Ari Van Assche, 2016. "Global Value Chains and Changing Trade Elasticities," Working Papers 2016-11, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    4. repec:bpj:bejmac:v:17:y:2017:i:1:p:24:n:2 is not listed on IDEAS
    5. P.J. Glandon & Ken Kuttner & Sandeep Mazumder & Caleb Stroup, 2019. "Macroeconomic Research, Present and Past," Department of Economics Working Papers 2019-06, Department of Economics, Williams College, revised Jul 2019.
    6. Elif C Arbatli & Gee Hee Hong, 2016. "Singapore’s Export Elasticities; A Disaggregated Look into the Role of Global Value Chains and Economic Complexity," IMF Working Papers 16/52, International Monetary Fund.
    7. Syed Al-Helal Uddin, 2016. "Value-added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness," 2016 Papers pud11, Job Market Papers.
    8. Swarnali A Hannan & Maximiliano Appendino & Michele Ruta, 2015. "Depreciations without Exports?; Global Value Chains and the Exchange Rate Elasticity of Exports," IMF Working Papers 15/400, International Monetary Fund.
    9. repec:spr:italej:v:4:y:2018:i:1:d:10.1007_s40797-018-0072-8 is not listed on IDEAS
    10. Robert C. Feenstra, 2017. "Statistics to Measure Offshoring and its Impact," NBER Working Papers 23067, National Bureau of Economic Research, Inc.
    11. Marczak, Martyna & Beissinger, Thomas, 2018. "Competitiveness at the country-sector level: New measures based on global value chains," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2018, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    12. Matteo Bugamelli & Silvia Fabiani & Stefano Federico & Alberto Felettigh & Claire Giordano & Andrea Linarello, 2018. "Back on Track? A Macro–Micro Narrative of Italian Exports," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(1), pages 1-31, March.
    13. Nikhil Patel & Zhi Wang & Shang-Jin Wei, 2014. "Global Value Chains and Effective Exchange Rates at the Country-Sector Level," NBER Working Papers 20236, National Bureau of Economic Research, Inc.
    14. repec:gam:jsusta:v:11:y:2019:i:10:p:2740-:d:230891 is not listed on IDEAS
    15. Sasahara, Akira, 2018. "Explaining the Employment Effect of Exports: Value-Added Content Matters," MPRA Paper 89731, University Library of Munich, Germany.
    16. Ahmed Swarnali & Appendino Maximiliano & Ruta Michele, 2017. "Global value chains and the exchange rate elasticity of exports," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(1), pages 1-24, January.
    17. repec:ers:journl:v:xxi:y:2018:i:special3:p:344-356 is not listed on IDEAS
    18. LI Zhigang & WEI Shang-Jin & ZHANG Hongyong, 2018. "Production Chains, Exchange Rate Shocks, and Firm Performance," Discussion papers 18058, Research Institute of Economy, Trade and Industry (RIETI).
    19. Gunnella, Vanessa & Al-Haschimi, Alexander & Benkovskis, Konstantins & Chiacchio, Francesco & de Soyres, François & Di Lupidio, Benedetta & Fidora, Michael & Franco-Bedoya, Sebastian & Frohm, Erik & G, 2019. "The impact of global value chains on the euro area economy," Occasional Paper Series 221, European Central Bank.

    More about this item

    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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