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The Influence of Intra-Industry Trade on Export Sensitivity to Exchange Rates

  • Yoko Oguro
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    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. It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented suggests that the gap in production costs has an influence on IIT as well. The empirical analysis investigates six 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 export sensitivity 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://hi-stat.ier.hit-u.ac.jp/research/discussion/2007/pdf/D07-222.pdf
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    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d07-222.

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    Date of creation: Oct 2007
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    Handle: RePEc:hst:hstdps:d07-222
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    1. Thorbecke, Willem, 2011. "The Effect of Exchange Rate Changes on Trade in East Asia," ADBI Working Papers 263, Asian Development Bank Institute.
    2. Mohsen Bahmani-Oskooee & Taggert Brooks, 1999. "Bilateral J-Curve between U.S. and her trading partners," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 156-165, March.
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    12. Greenaway, David & Hine, Robert C & Milner, Chris, 1995. "Vertical and Horizontal Intra-industry Trade: A Cross Industry Analysis for the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(433), pages 1505-18, November.
    13. Eaton Jonathan & Tamura Akiko, 1994. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 478-510, December.
    14. 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.
    15. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
    16. 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.
    17. 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.
    18. Rose, Andrew K., 1990. "Exchange rates and the trade balance : Some evidence from developing countries," Economics Letters, Elsevier, vol. 34(3), pages 271-275, November.
    19. Marquez, Jaime, 1990. "Bilateral Trade Elasticities," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 70-77, February.
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