Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade

By Yoko Oguro, Kyoji Fukao, Yougesh Khatri

May 1, 2008

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Yoko Oguro, Kyoji Fukao, and Yougesh Khatri. Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper theoretically and empirically investigates export sensitivity to exchange rates in the context of intra-industry trade (IIT). It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented suggests the gap in production costs between two countries has an influence on IIT as well. Industry-level pane regressions of thirty-eight trading pairs provide strong empirical support for the idea that the exchange rate sensitivity of exports declines in concert with the extent of ITT. An obvious policy implication is that the effectiveness of exchange rates in addressing trade imbalances will diminish as the extent of IIT increases.

Subject: Currencies, Exchange rates, Exports, Real exchange rates, Trade balance

Keywords: WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/134
Stock No:

WPIEA2008134
ISBN:

9781451869934
ISSN:

1018-5941

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