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

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.Trade;Exchange rates;Capital inflows;Economic conditions;Liquidity management;exchange rate, industry trade, elasticity of substitution, exchange rate movements, real exchange rate, metal products, bilateral trade, international trade, trade flows, trade imbalances, trading partner, real exchange rates, export quantity, trade values, commodity trade, export volumes, product differentiation, trading partners, export prices, importing country, exchange rate adjustments, world economy, export quantities, bilateral trade flows, world trade, multilateral trade, exchange rate devaluations, reciprocal dumping, export value, exchange rate realignment, exporting countries, export equations, trade patterns, foreign investment, commercial policy, exchange rate changes, elasticity of trade, trade costs, value of trade, exchange rate appreciation, commodity composition, trade deficit, effect of exchange rate changes, trade diversion