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

Author/Editor:

Yoko Oguro ; Kyoji Fukao ; Yougesh Khatri

Publication Date:

May 1, 2008

Electronic Access:

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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.

Series:

Working Paper No. 2008/134

Subject:

Currencies Exchange rates Exports Real exchange rates Trade balance

English

Publication Date:

May 1, 2008

ISBN/ISSN:

9781451869934/1018-5941

Stock No:

WPIEA2008134

Pages:

20

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