The Influence of Intra-Industry Trade on Export Sensitivity to Exchange Rates

First version: October 2007; This version: December 2007Exchange rates play a key role in the literature on the determinants of trade, and this role is currently receiving a great deal of attention in the context of global imbalances. This paper adds to the literature that suggests that exports will be less sensitive to exchange rate movements under certain circumstances. This is the first study, to the author's best knowledge, which empirically investigates the sensitivity of export quantities 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 in this paper suggests that the gap in production costs has an influence on IIT as well. The empirical analysis investigates six cross-country industry-panels for the bilateral trade of eight East Asian countries, Japan, and the United States with the EU, East Asia, Japan, and North America. The empirical results confirm that export sensitivity to exchange rates declines as the extent of IIT increases. An obvious policy implication of the findings is that the effectiveness of exchange rate adjustments as a policy tool for addressing trade imbalances diminishes when substantial IIT exists.21世紀COEプログラム = 21st-Century COE ProgramRevised Version: December 200