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

First version: October 2007; This version: February 2008This paper adds to the literature that suggests that exports become less sensitive to exchange rate movements under certain circumstances. Focusing on the industry-specific sensitivity of export quantities to exchange rates in the context of intra-industry trade (IIT), this paper theoretically and empirically investigates this relationship. It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented 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, Asia, Japan, and North America. The results confirm that export sensitivity to exchange rates declines as the extent of IIT increases. The policy implication of the results is that exchange rate revaluations become a less powerful tool to redress trade imbalances when substantial IIT exists.21世紀COEプログラム = 21st-Century COE ProgramRevised Version: February, 200