Global value chains and the exchange rate elasticity of exports

Abstract

This paper analyzes how the formation of global value chains (GVCs) has affected the exchange rate elasticity of exports. Using a panel framework covering 46 countries over the period 1996–2012, we first find some suggestive evidence that the elasticity of real manufacturing exports to the real effective exchange rate (REER) has decreased over time. We then examine whether the formation of supply chains has affected this elasticity using different measures of GVC integration. Intuitively, as countries are more integrated in global production processes, a currency depreciation only improves competitiveness of a fraction of the value of final good exports. In line with this intuition, we find evidence that GVC participation reduces the REER elasticity of manufacturing exports by 22 percent, on average.

Mexico and China in the US manufacturing market: An empirical analysis

“…In the case of the developing economies, the evidence provided by Reinhart (1995), Senhadji and Montenegro (1999) and Garcés (2008) suggests that: (i) exports are more responsive to external demand than to changes in relative prices, and (ii) exchange rate depreciation raises exports by lowering their foreign-currency price. One caveat to this conclusion is the evidence that the greater importance of GVCs has significantly altered the relationship between real exchange rate movements and manufacturing exports (Swarnali, Appendino, and Ruta, 2017;Cheng et al, 2016).…”

“…As we argue further below, this is consistent with the notion that a real depreciation of the peso lowers international competitiveness and IMSs in the US by way of making imported intermediate inputs, capital stock and technology more expensive in terms of domestic currency. Some earlier research suggests that the formation of GVCs and the increasing import-content of exports have transformed the relationship between currency depreciation and exports (Swarnali, Appendino, and Ruta, 2017;Cheng et al, 2016). By the same token, Chen (2017) shows that an undervalued exchange rate slows down R&D activity and thus technological progress.…”

Global value chain and its impact on the linkage between exchange rate and export: Cases of China, Japan and Korea

“…In addition, many studies such as Ahmed et al (2015), Harris (1995) and Rose and Yellen (1989) include initial productions of exporters as important factors in the empirical specification.…”

“…One of the recent explanations which supports the disconnect argument is that deepening interconnection of production process among countries and followed increasing imports of intermediate goods leads the currency depreciation to have limited impact on exports (Ollivaud, Rusticelli, & Schwellnus, 2015). Ahmed, Appendino, and Ruta (2015) conduct empirical test with 46 countries to assess whether formation of global value chains (GVCs) changes the exchange rate elasticity of exports. They suggest some evidence that growing participation in GVCs reduces the elasticity of real manufacturing exports to real effective exchange rates (REERs).…”

Global Value Chain Participation and Exchange Rate Pass-Through

“…However, due to their use of microeconomic models neither Amiti et al (2014) nor Amiti et al (2018) take into account international general equilibrium effects; also, they are not concerned with the secular decline in ERPT to import prices discussed in the macroeconomic literature. Ahmed et al (2017) study whether GVCP has affected the elasticity of manufacturing exports to the real effective exchange rate through a mechanism similar to the one explored in this paper. Consistent with our findings for ERPT, Ahmed et al (2017) find that GVCP has reduced the exchange rate elasticity of manufacturing exports in the late 1990s and 2000s.…”