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Demand for Value Added and Value-Added Exchange Rates†

Demand for Value Added and Value-Added Exchange Rates† AbstractWe examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness. (JEL E31, F23, F31, L14) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Demand for Value Added and Value-Added Exchange Rates†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20150216
Publisher site
See Article on Publisher Site

Abstract

AbstractWe examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness. (JEL E31, F23, F31, L14)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Oct 1, 2017

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