Working Paper: NBER ID: w26071
Authors: Christopher L. House; Christian Proebsting; Linda L. Tesar
Abstract: We exploit differences across U.S. states in terms of their exposure to trade to study the effects of changes in the exchange rate on economic activity at the business cycle frequency. We find that a depreciation in the state-specific trade-weighted real exchange rate is associated with an increase in exports, a decline in unemployment and an increase in hours worked. The effect is particularly strong in periods of economic slack. We develop a multi-region model with inter-state trade and labor flows and calibrate it to match the state-level orientation of exports and the extent of labor migration and trade between states. The model replicates the relationship between exchange rates and unemployment. Counterfactuals show that the high degree of interstate trade plays a dominant role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in following years. 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.
Keywords: exchange rates; economic activity; unemployment; exports
JEL Codes: F22; F41; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| State-specific trade-weighted real exchange rate changes (F14) | Unemployment (J64) |
| State-specific trade-weighted real exchange rate changes (F14) | Economic activity (E29) |
| Exchange rate changes (F31) | Labor hiring (J23) |
| Tariff on U.S. goods by China (F19) | Unemployment (J64) |
| Increased demand from foreign consumers (F69) | Labor hiring (J23) |
| Increased demand from foreign consumers (F69) | Output expansion (Y60) |