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Global value chains and the missing link between exchange rates and export diversification

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  • Tran, Thi Anh-Dao
  • Phi, Minh Hong
  • Thai, Long

Abstract

Conceptually, the present paper links export diversification and the real exchange rate (RER) by investigating the direction of causation. On one hand, a stable and competitive exchange rate is a key instrument in promoting export diversification through the tradable sectors’ profitability. But on the other hand, export diversification can help to reduce macroeconomic volatility, which in turn helps to consolidate a stable and competitive exchange rate. We propose a Granger causality test using panel data of the relationship in the middle-income countries of Asia and Latin America over the period from 1995 to 2015. We augment our baseline specification by examining how FDI (a key vehicle of GVC participation) and financial crises (which expose GVCs to disruptions) affect the causal relationship. Intuitively, the benefits of participation in GVCs may differ across countries, depending on external factors that might influence economic outcomes.

Suggested Citation

  • Tran, Thi Anh-Dao & Phi, Minh Hong & Thai, Long, 2020. "Global value chains and the missing link between exchange rates and export diversification," International Economics, Elsevier, vol. 164(C), pages 194-205.
    • Handle: RePEc:eee:inteco:v:164:y:2020:i:c:p:194-205
    DOI: 10.1016/j.inteco.2020.10.001
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    More about this item

    Keywords

    Global value chains; Export diversification; Real exchange rate; Emerging Asia and Latin America; Financial crises;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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