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  4. October 2017
  5. Demand for Value Added and Value-Added Exchange Rates

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Demand for Value Added and Value-Added Exchange Rates

  • Rudolfs Bems
  • Robert C. Johnson
American Economic Journal: Macroeconomics
vol. 9, no. 4, October 2017
(pp. 45–90)
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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 that these conceptual insights are quantitatively important in a case study of European competitiveness.

Citation

Bems, Rudolfs, and Robert C. Johnson. 2017. "Demand for Value Added and Value-Added Exchange Rates." American Economic Journal: Macroeconomics, 9 (4): 45–90. DOI: 10.1257/mac.20150216

Additional Materials

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • F23 Multinational Firms; International Business
  • F31 Foreign Exchange
  • L14 Transactional Relationships; Contracts and Reputation; Networks
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