Working Paper: NBER ID: w18498
Authors: Rudolfs Bems; Robert C. Johnson
Abstract: This paper updates the conceptual foundations for measuring real effective exchange rates (REERs) to allow for vertical specialization in trade. We derive a value-added REER describing how demand for the value added that a country produces changes as the price of its value added changes relative to competitors. We then compute this index for 42 countries from 1970-2009 using trade measured in value added terms and GDP deflators. There are substantial differences between value-added and conventional REERs. For example, China's value-added REER appreciated by 20 percentage points more than the conventional REER from 2000-2009. These differences are driven mainly by the theory-motivated shift in prices used to construct the value-added REER, not changes in bilateral weights.
Keywords: Value-Added Exchange Rates; Competitiveness; Vertical Specialization; Real Effective Exchange Rates
JEL Codes: F1; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the price of a country’s value-added (D46) | decrease in demand for that value-added (D46) |
| differences in the value-added REER and conventional REER (F31) | shift from consumer prices to value-added prices (P22) |
| value-added REER (F16) | more accurate reflection of competitiveness (D43) |
| changes in weights due to trade dynamics (F14) | do not significantly affect the REER calculations (F31) |
| price changes (P22) | observed differences in REER (F31) |