Abstract
This paper contributes to the debate on the magnitude of exchange rate elasticities by providing a set of price and quantity elasticities for 51 advanced and emerging-market economies. Specifically, we report for each of these countries the elasticity of trade prices and trade quantities on the export and on the import side, as well as the reaction of the trade balance. To this aim, the paper uses a large unified database of highly disaggregated bilateral trade flows, covering 5000 products and more than 160 trading partners. We present a range of estimates using not only standard regression techniques but also generated regressors that aim to uncover changes in the exchange rate elasticities due to unobserved marginal costs and competitor prices in the importing market. Our results show that quantity elasticities are significantly below one, pass-through is incomplete and export prices react significantly to exchange rate changes. In spite of low quantity elasticities, the trade balance reacts positively to a depreciation in all countries because export and import prices adjust. Overall, our findings suggest that exchange rate changes can play an important role in addressing global trade imbalances.
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Notes
The list of countries includes 26 emerging markets and 25 advanced economies and broadly corresponds to that of the IMF External Balance Assessment (EBA); see full list of countries in Table 1.
In Tables 2 and 3 we report other key statistics such as the simple mean, a weighted mean using the relative size of nominal exports and imports, as well as the standard deviation of the coefficients across countries. In Section 4 we comment on selected country-specific results and compare aggregate elasticities between advanced and emerging-market economies.
The coefficients that we estimated in the baseline regression for export and import prices are positively correlated with existing studies, as explained in Section 4.
Note that our specifications are symmetric and linear, so an appreciation is expected to have the same effect as a depreciation, with the opposite sign.
Given this definition of exchange rates, an increase in sijt implies a depreciation of country i’s currency, which improves its competitiveness in foreign markets.
We refer to Friberg (1998) for the seminal contribution on the exchange rate pass-through with risk averse firms. In the robustness section, we analyze the exchange rate pass-through with respect to the forward exchange rate to mitigate the concern that the aggregate pass-through is driven by firms hedging exchange rate risk.
Mumtaz et al. (2006) find evidence that neglecting cross-sector heterogeneity biases pass-through estimates.
See the Appendix for details.
We follow Gaulier et al. (2008) and define the weighting variable as follows:
In the robustness section, we follow Boz et al. (2017) and explicitly distinguish between the bilateral exchange rate variation and the variation of the exporter’s currency to the US dollar.
Note that for any triplet of countries a, b and c, we have \(\log s_{ab}=-\log s_{ba}\) and \(\log s_{ab}=\log s_{ac}-\log s_{cb}\) by arbitrage. The within transformation with time-varying exporter and importer-product fixed effects implies that \(\log s_{ab}-\log s_{ac}-\log s_{cb}\) equals zero. In this sense, the exchange rate is a monadic variable, see Head and Mayer (2014).
The quantity equations are, for example, consistent with a two-tier CES demand system, where changes in GDP capture aggregate demand changes, see among others Imbs and Méjean (2015), and more generally with aggregate exchange rate regressions in the pricing-to-market literature, see Burstein and Gopinath (2014).
In line with the definition of the bilateral exchange rate, a depreciation of the nominal exchange rate of exporter i increases si.
The baseline regressions are nevertheless very informative as they report the reaction of prices and quantities to exchange rate changes as observed in the aggregate data. On the other hand, the fixed-effect regressions shed light on the role of specific factors that determine the aggregate response of trade prices and quantities to changes of the exchange rate.
This finding is consistent with the evidence from Auer and Schoenle (2016), who use detailed US import data and show that the exchange rate pass-through is decreasing when controlling for price changes by competitors.
We do not to report them in order to save space. Detailed results are available upon request.
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We would like to thank an anonymous referee, Olivier Blanchard, Emine Boz, Meredith Crowley, Linda Goldberg, Jean Imbs, Oleg Itskhoki, Oleksiy Kryvtsov, Philippe Martin, Thierry Mayer, Isabelle Méjean, Kadee Russ, Cyrille Schwellnus, Vincent Vicard and seminar participants at the 2018 ASSA meetings, Deutsche Bundesbank, the Banque de France, the Bank of Canada, Michigan State University and at the Paris School of Economics for helpful comments and discussions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Banque de France of the Eurosystem and the Bank of Canada.
Appendix
Appendix
To show that the import and the export exchange rate pass−through are linked, consider the following simplified example. Suppose there are three countries: France, the United Kingdom and the United States. Based on Eq. 5, we can write the import exchange rate pass−through for the United States as follows:
where pUS,i,t is the import price of the United States from exporter i at the time t and \(\beta _{US}^{M}\) is the import price elasticity. Equivalently, we can write the change in the import price to the United States as a function of the export price elasticity of all i countries, i.e., France and the United Kingdom. Consider the export price of France to the United States in US dollars:
Then the import price of the United States can be written as the trade−weighted average of the changes in the bilateral import prices with France and the bilateral import prices with the United Kingdom:
where wUS,i,t is the import share of country i in total US imports. Substituting the equation of the export elasticity into the import elasticity, we get:
Thus, the import pass−through coefficient is a weighted average of all export pass−through coefficients of all trading partners. More generally, we can write the link between the import and elasticity for an arbitrary number of trading partners J:
Next, suppose that the US dollar depreciates by 10% against all other currencies, i.e., \(\frac {s_{US,j,t}}{s_{US,j,t-1}}=1.1 \forall j\), then \({\sum }_{j=1}^{J}w_{US,j,t}{\beta _{j}^{X}}=\beta _{US}^{M}\) and the import pass−through is an arithmetic mean of the export pass−through coefficient of trading partners.
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Bussière, M., Gaulier, G. & Steingress, W. Global Trade Flows: Revisiting the Exchange Rate Elasticities. Open Econ Rev 31, 25–78 (2020). https://doi.org/10.1007/s11079-019-09573-3
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DOI: https://doi.org/10.1007/s11079-019-09573-3