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Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade

Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade by Yoko Oguro
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This paper theoretically and empirically investigates export sensitivity to exchange rates in the context of intra-industry trade (IIT). It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented suggests the gap in production costs between two countries has an influence on IIT as well. Industry-level pane regressions of thirty-eight trading pairs provide strong empirical support for the idea that the exchange rate sensitivity of exports declines in concert with the extent of ITT. An obvious policy implication is that the effectiveness of exchange rates in addressing trade imbalances will diminish as the extent of IIT increases.
International Monetary Fund; May 2008
20 pages; ISBN 9781451994353
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Title: Trade Sensitivity to Exchange Rates in the Context of Intra-Industry Trade
Author: Yoko Oguro; Kyoji Fukao; Yougesh Khatri