Regional Effects of Exchange Rate Fluctuations

Abstract

We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade‐weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state‐level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross‐sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

Monetary Policy and Regional Inequality

“…These variables routinely feature in ECB policy communication; 21 and they appear as potentially important controls at a disaggregated level where the typical spatial concentration of different types of economic activity may render certain regions more and others less responsive to these types of shocks (see, e.g. House, Proebsting and Tesar (2019) for a recent analysis documenting differential effects of exchange rate fluctuations across US regions). 22 Further, we include the long-term government bond yield spread vis-à-vis Germany in the list of explanatory variables to control for differences in country-specific risk premia, which played a dominant role especially during the euro area sovereign debt crisis.…”

Risk Sharing and Monetary Policy Transmission

“…Specifically, we include global oil prices and the real effective exchange rate against major trading partners as they often feature in ECB policy communication and are likely to have different effects on a given region depending on its economic structure (e.g. House et al, 2020). The inclusion of these two variables yield impulse response functions close to our baseline estimations (Figure 10 in Annex E.3).…”

China’s exports in a protectionist world

“…Krugman (1979) and Eaton and Kortum (2002) also showed this correspondence employing standard models. Because of this relationship, House et al (2019) used exchange rate elasticities to calculate the effect of Chinese tariffs on the U.S. economy.…”