Working Paper: NBER ID: w20236
Authors: Nikhil Patel; Zhi Wang; Shangjin Wei
Abstract: The real effective exchange rate (REER) is one of the most cited statistical constructs in open-economy macroeconomics. We show that the models used to compute these numbers are not rich enough to allow for the rising importance of global value chains. Moreover, because different sectors within a country participate in international production sharing at different stages, sector level variations are also important for determining competitiveness. Incorporating these features, we develop a framework to compute REER at both the sector and country level and apply it on inter-country input-output tables to study the properties of the new measures of REER for 35 sectors in 40 countries.
Keywords: Global Value Chains; Real Effective Exchange Rate; Sectoral Heterogeneity
JEL Codes: F1; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real effective exchange rate (REER) (F31) | competitiveness (L13) |
| depreciation of the Japanese yen (F31) | Chinese competitiveness (F23) |
| sectoral heterogeneity (J42) | REER weights (C51) |
| foreign price changes (F31) | REER variations across sectors (R39) |
| sectoral engagement in global value chains (F61) | computed REER (F31) |