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Exchange rate movements, export sophistication and direction of trade: the development channel and North–South trade flows

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  • Mustafa Caglayan
  • Firat Demir

Abstract

We study the effects of real exchange rate (RER) changes on trade flows considering the skill content and origin/destination of products in a North–South framework. The empirical analysis is based on bilateral trade flows in five product categories of technology-and-skill intensities between 172 countries during 1962–2012. Consistent with the development channel, we find that both the composition and direction of trade affect how exports respond to RER changes. We find that high-skill manufactures and primary goods are the least affected from RER depreciation and volatility. The strongest effects are found for medium-skill, low-skill and resource-intensive manufactures. We also show that these effects depend on the direction of trade. Southern exports are more sensitive to RER than Northern exports in all product categories except for primary goods. Regarding volatility, South–North exports are hurt the most while North–South the least. Also, South–South exports appear to be less sensitive to volatility in all product groups than South–North. Overall, this paper provides a synthesis of the recent neoclassical international trade literature with the heterodox development literature.

Suggested Citation

  • Mustafa Caglayan & Firat Demir, 2019. "Exchange rate movements, export sophistication and direction of trade: the development channel and North–South trade flows," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(6), pages 1623-1652.
    • Handle: RePEc:oup:cambje:v:43:y:2019:i:6:p:1623-1652.
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    File URL: http://hdl.handle.net/10.1093/cje/bez005
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    Citations

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    Cited by:

    1. Felipe Orsolin Teixeira & Fabricio Jose Missio & Ricardo Dathein, 2022. "Economic complexity, structural transformation and economic growth in a regional context: Evidence for Brazil," PSL Quarterly Review, Economia civile, vol. 75(300), pages 63-79.
    2. Sascha Keil & Walter Paternesi Meloni, 2024. "Kaldorian cumulative causation in the Euro area: an empirical assessment of divergent export competitiveness," Chemnitz Economic Papers 063, Department of Economics, Chemnitz University of Technology.
    3. Gabriel Porcile & Giuliano Toshiro Yajima, 2019. "New Structuralism and the balance-ofpayments constraint," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(4), pages 517-536, October.
    4. Porcile, Gabriel & Sartorello Spinola, Danilo & Yajima, Giuliano, 2020. "Patterns of growth in structuralist models: The role of the real exchange rate and industrial policy," MERIT Working Papers 2020-027, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Ramos-Herrera, María del Carmen & Sosvilla-Rivero, Simón, 2023. "Economic growth and deviations from the equilibrium exchange rate," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 764-786.
    6. Robert A. Blecker, 2022. "New advances and controversies in the framework of balance‐of‐payments‐constrained growth," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 429-467, April.
    7. Firat Demir & Arslan Razmi, 2022. "The Real Exchange Rate And Development Theory, Evidence, Issues And Challenges," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 386-428, April.
    8. Porcile, Gabriel & Spinola, Danilo & Yajima, Giuliano, 2021. "Patterns of Growth in Structuralist Models: The Role of PoliticalEconomy," CAFE Working Papers 12, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    9. Thorbecke, Willem & Salike, Nimesh & Chen, Chen, 2022. "The impact of exchange rate changes on the Japanese chemical industry," Japan and the World Economy, Elsevier, vol. 62(C).
    10. Hugo Iasco-Pereira & Fabricio José Missio, 2022. "Would a competitive real exchange rate be a driver of economic prosperity?," PSL Quarterly Review, Economia civile, vol. 75(303), pages 355-383.

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