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.
Bems, Rudolfs, and Robert C. Johnson.
"Demand for Value Added and Value-Added Exchange Rates."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
Multinational Firms; International Business
Transactional Relationships; Contracts and Reputation; Networks