Working Paper: NBER ID: w29428
Authors: James E. Anderson; Praveen Saini
Abstract: This paper improves on current treatment of exchange rate variation in quantitative trade models. Exchange rate changes with heterogeneous passthrough to buyers are embedded in the structural gravity model. Quantification on two digit annual bilateral trade data reveals real effects of exchange rate changes on producers that are substantial for some country-sector-time period observations. Real national income effects are small but not always negligible. Effective exchange Rates with Gravitas (ERGs) are introduced as theory-consistent indexes to guide potential policy remedies.
Keywords: exchange rates; trade frictions; structural gravity model; effective exchange rates; policy implications
JEL Codes: F1; F13; F14; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bilateral exchange rate changes with heterogeneous passthrough (F31) | Real trade frictions (F12) |
| Bilateral exchange rate changes (F31) | Bilateral trade (F10) |
| Heterogeneous passthrough to buyer price movements (G19) | Real effects on trade flows (F69) |
| Exchange rate changes (F31) | Producers' real effects (D22) |
| Exchange rate changes (F31) | National income effects (F40) |
| Effective exchange rates (ERGs) (F31) | Trade policy implications (F68) |
| Passthrough of exchange rate changes to prices (F31) | Real effects on trade (F19) |
| Structural gravity model (R15) | Enhanced predictive accuracy (C52) |
| Exchange rate undervaluation (F31) | General equilibrium effects (D50) |