February 2021

Bought, Sold and Bought Again: The Impact of Complex Value Chains on Export Elasticities

François de Soyres, Erik Frohm, Vanessa Gunnella and Elena Pavlova

Abstract:

Global value chain (GVC) participation affects the relationship between trade volumes and exchange rate movements. Guided by a simple theory, we show that exports react to the exchange rate between the country producing value added contained in exports and the country of final absorption for this value added. Three predictions follow: (i) a higher share of foreign value added in exports reduce the responsiveness of export volumes to exchange rate changes, (ii) a greater share of exports that returns as imports also reduce the responsiveness of export volumes and (iii) a higher share of inputs that are further reexported increase the responsiveness of exports to the trading partner's nominal effective exchange rate. Using a large origin-sector-destination level panel data set covering the period 1995-2009 and around 85% of world GDP, we find strong empirical support for these predictions. We further show that some sectors in some countries can experience a decline in gross exports when their currency depreciates.

Keywords: export elasticities, global value chains, currency unions, exchange rate passthrough

DOI: https://doi.org/10.17016/IFDP.2021.1309

PDF: Full Paper

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Last Update: February 04, 2021