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Intermediate inputs, external rebalancing and relative price adjustment

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  • Bems, Rudolfs
Abstract
The traditional multi-sector macro model without production inputs is a value-added trade model. This paper shows that calibrating such a misspecified value-added trade model to available gross-flow trade data – a common practice in the literature – can lead to mismeasured (i) preference weights and (ii) price elasticities. Further, the calibrated model can give substantially different predictions regarding the relative price response to external rebalancing, when compared to a preferred alternative model with inputs that is consistent with gross-flow trade data. We find that mismeasured preference weights and price elasticities both contribute sizably to deviations in model predictions and estimate correctly-measured parameters for the value-added trade model.

Suggested Citation

  • Bems, Rudolfs, 2014. "Intermediate inputs, external rebalancing and relative price adjustment," Journal of International Economics, Elsevier, vol. 94(2), pages 248-262.
    • Handle: RePEc:eee:inecon:v:94:y:2014:i:2:p:248-262
    DOI: 10.1016/j.jinteco.2014.08.007
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    Cited by:

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    2. Arne J. Nagengast & Robert Stehrer, 2016. "Accounting for the Differences Between Gross and Value Added Trade Balances," The World Economy, Wiley Blackwell, vol. 39(9), pages 1276-1306, September.
    3. Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
    4. Alejandro Cuñat & Robert Zymek, 2017. "Specialization Patterns, GDP Correlations, and External Balances," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 141-161.
    5. Rudolfs Bems & Robert C. Johnson, 2017. "Demand for Value Added and Value-Added Exchange Rates," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 45-90, October.
    6. Duval, Romain & Li, Nan & Saraf, Richa & Seneviratne, Dulani, 2016. "Value-added trade and business cycle synchronization," Journal of International Economics, Elsevier, vol. 99(C), pages 251-262.
    7. Sonia A. Agudelo & Hector Sala, 2016. "Wage setting in the Colombian manufacturing industry," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(1), pages 99-134, January.
    8. Haihong Gao & Yingting Li, 2020. "The Renminbi as a Trading Currency: Evidence from Selected Countries Participating in the Belt and Road Initiative," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(5), pages 45-63, September.
    9. Adler, Gustavo & Meleshchuk, Sergii & Buitron, Carolina Osorio, 2023. "Global value chains and external adjustment: Do exchange rates still matter?," Economic Modelling, Elsevier, vol. 118(C).
    10. Robert Zymek & Alejandro Cunat, 2017. "International Value-Added Linkages in Development Accounting," Edinburgh School of Economics Discussion Paper Series 281, Edinburgh School of Economics, University of Edinburgh.
    11. Alonso de Gortari, 2018. "Disentangling Global Value Chains," 2018 Meeting Papers 139, Society for Economic Dynamics.
    12. Alonso de Gortari, 2019. "Disentangling Global Value Chains," NBER Working Papers 25868, National Bureau of Economic Research, Inc.
    13. Syed Al-Helal Uddin, 2016. "Value-added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness," 2016 Papers pud11, Job Market Papers.
    14. Felice, Giulia & Tajoli, Lucia, 2021. "Trade balances and global value chains: Is there a link?," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 228-246.

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    More about this item

    Keywords

    Real exchange rate; External sector adjustment; Intermediate inputs; Transfer problem;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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