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To chain or not to chain trade-weighted exchange rate indexes

Listed author(s):
  • Cletus C. Coughlin
  • Patricia S. Pollard
  • Jerram C. Betts

With the advent of chain calculations for the U.S. national income and product accounts, it seems reasonable to contemplate using the chain approach for other indexes, such as trade-weighted exchange rates (TWEXs). A fundamental criticism of measuring the growth of gross domestic product by a fixed-base-year method is that the estimates are highly sensitive, especially when the economy?s structure is changing dramatically, to the arbitrary choice of the base year. Such a criticism can be levied against TWEXs. In fact, even TWEXs constructed using a Paasche index rather than a Laspeyres index have problems related to base periods. We examine theoretically and empirically the use ofa chain TWEX in relation to two well-known TWEX indexes: the Federal Reserve Bank of Atlanta index, which uses a Laspeyres index, and the Federal Reserve Bank of Dallas index, which uses a Paasche index. The choice of base year alters the behavior ofthe dollar in these two indexes. We contrast this result with the behavior of the dollar in comparable chain TWEXs, where the base year sensitivity is absent. Our results indicate that developers of TWEXs, as well as those revising TWEXs, should consider a chain approach. Furthermore, users need to be aware of the sensitivity of TWEXs to changes in either the base period for trade weights or the reference base period for exchange rates

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1996-010.

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Date of creation: 1997
Publication status: Published in The International Trade Journal, Fall 1998
Handle: RePEc:fip:fedlwp:1996-010
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  1. W. Michael Cox, 1986. "A new alternative trade-weighted dollar exchange rate index," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Sep, pages 20-28.
  2. Dallas S. Batten & Michael T. Belongia, 1987. "Do the new exchange rate indexes offer better answers to old questions?," Review, Federal Reserve Bank of St. Louis, issue May, pages 5-17.
  3. B. Dianne Pauls & William L. Helkie, 1987. "A reassessment of measures of the dollar's effective exchange value," International Finance Discussion Papers 306, Board of Governors of the Federal Reserve System (U.S.).
  4. Feinberg, Robert M, 1991. "The Choice of Exchange-Rate Index and Domestic Price Passthrough," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 409-420, June.
  5. Jeffrey A. Rosensweig, 1986. "A new dollar index: capturing a more global perspective," Economic Review, Federal Reserve Bank of Atlanta, issue Jun, pages 12-22.
  6. B. Dianne Pauls, 1987. "Measuring the foreign-exchange value of the dollar," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 411-422.
  7. Cletus C. Coughlin & Thomas B. Mandelbaum, 1991. "Measuring state exports: is there a better way?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-79.
  8. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  9. Cletus C. Coughlin & Patricia S. Pollard, 1996. "A question of measurement: is the dollar rising or falling?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-18.
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