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Estimating the Effect of Exchange Rate Changes on Total Exports

Author

Listed:
  • Thierry Mayer

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Banque Nationale du Canada)

  • Walter Steingress

    (Banque Nationale du Canada)

Abstract

This paper shows that real effective exchange rate (REER) regressions, the standard approach for estimating the response of aggregate exports to exchange rate changes, imply biased estimates of the underlying elasticities. We provide a new aggregate regression specification that is consistent with bilateral trade flows micro-founded by the gravity equation. This theory-consistent aggregation leads to unbiased estimates when prices are set in an international currency as postulated by the dominant currency paradigm. We use Monte-Carlo simulations to compare elasticity estimates based on this new "ideal-REER" regression against typical regression specifications found in the REER literature. The results show that the biases are small (around 1 percent) for the exchange rate and large (around 10 percent) for the demand elasticity. We find empirical support for this prediction from annual trade flow data. The difference between elasticities estimated on the bilateral and the aggregate levels reduce significantly when applying an ideal-REER regression rather than a standard REER approach.

Suggested Citation

  • Thierry Mayer & Walter Steingress, 2020. "Estimating the Effect of Exchange Rate Changes on Total Exports," Sciences Po Economics Publications (main) hal-03948118, HAL.
    • Handle: RePEc:hal:spmain:hal-03948118
    DOI: 10.1016/j.jimonfin.2020.102184
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    Cited by:

    1. de Soyres, François & Frohm, Erik & Gunnella, Vanessa & Pavlova, Elena, 2021. "Bought, sold and bought again: The impact of complex value chains on export elasticities," European Economic Review, Elsevier, vol. 140(C).
    2. Caglayan Aslan & Ferdi Akpiliç, 2024. "Do the export reactions to exchange rate and exchange rate volatility differ depending on technology intensity? New evidences from the panel SVAR analysis," Empirical Economics, Springer, vol. 66(4), pages 1587-1631, April.
    3. Crozet, Matthieu & Hinz, Julian & Trionfetti, Federico, 2023. "Exchange rate pass-around," Kiel Working Papers 2247, Kiel Institute for the World Economy.
    4. Adler, Gustavo & Meleshchuk, Sergii & Buitron, Carolina Osorio, 2023. "Global value chains and external adjustment: Do exchange rates still matter?," Economic Modelling, Elsevier, vol. 118(C).
    5. Thomas Goda & Alejandro Torres García & Cristhian Larrahondo, 2024. "Real exchange rates and manufacturing exports in emerging economies: the role of sectoral heterogeneity and product complexity," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(3), pages 1057-1082, August.
    6. Gnangnon, Sèna Kimm & Iyer, Harish, 2021. "Effect of Aid for Trade and Foreign Direct Investment Inflows on the Utilization of Unilateral Trade Preferences offered by the QUAD countries," EconStor Preprints 238211, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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