Demand for Value Added and Value-Added Exchange Rates
American Economic Journal: Macroeconomics, 9 (4), 2017
with R. Bems
Abstract: We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners, because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate these conceptual insights are quantitatively important in a case study of European competitiveness.
Previous draft available as NBER Working Paper 21070. This paper combines material from two papers previously circulated under the titles ``Value-Added Exchange Rates'' (NBER Working Paper No. 18498, October 2012) and ``International Prices and Demand for Value Added with Global Supply Chains'' (July 2014).