Working Paper: NBER ID: w21070
Authors: Rudolfs Bems; Robert C. Johnson
Abstract: We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
Keywords: value added; exchange rates; global supply chains; demand elasticity
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in international relative prices (F31) | demand for domestic value added (R22) |
| input linkages (Y80) | competitiveness (L13) |
| competitiveness (L13) | demand for domestic value added (R22) |
| depreciation (D25) | competitiveness of supply chain partners (L14) |
| competitiveness of supply chain partners (L14) | demand for their products (J23) |
| relative elasticities of substitution between inputs and final goods (D11) | net effect on demand for value added (D46) |