Global Value Chain Participation and Exchange Rate Pass-Through

Abstract

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Global Value Chains: Measurement, Trends and Drivers

“…Consequently, an appreciation vis-à-vis a trading partner from which a given country imports intermediate goods may be beneficial for the competitiveness of that country as it reduces the cost of intermediate goods imports. To account for this effect, input-output real effective exchange rates (IOREERs) are widely computed in the literature (Georgiadis et al, 2020). In addition, in a world characterised by cross-border production chains, export market shares computed with gross trade flows may not fully reflect a country's contribution to global production.…”

Global value chains and exchange rate pass-through—The role of non-linearities

“…In our paper we follow another strand of literature, which relates the drop in ERPT to import prices to development of global values chains (GVC). As pointed out by some authors (Amiti et al, 2014, Georgiadis et al, 2019, De Soyres et al, 2018 vertical specialization within global value chains accompanied by higher import intensity of exports may result in weaker response of import prices to exchange rate fluctuations. This mechanism can be described as follows.…”

“…In this strand of literature Georgiadis et al (2019) propose a structural two-country model with trade in intermediate goods and local/producer-currency pricing to study a variation in the share of imported intermediate goods in the overall production costs. They evidence a decrease in ERPT to import prices and increase in ERPT to export prices in local (home) currency due to the growing GVC participation for 33 advanced and emerging economies in 2000.…”

“…The first method is a two-step approach. In the first step the exchange rate pass-through coefficient is calculated for a rolling sample and next the estimates of ERPT from the first step are regressed on various GVC participation measures (Georgiadis et al, 2019). The second approach is a one-step method and uses linear models with explanatory interaction variables constructed as a product of nominal exchange rate and different measures of GVC participation (De Soyres et al, 2018).…”