Currency Depreciations Don’t Boost Exports as Much as They Used To

The export-less depreciation of the yen has opened a debate on the power of exchange rates to boost exports. This column presents new evidence on how the exchange rate elasticity of exports has changed over time and across countries, and how global value chains have affected it. The upshot is that greater integration in global value chains makes exports substantially less responsive to exchange rate depreciations.

Competitively valued exchange rates are often seen as crucial to promote exports (e.g. Freund and Pierola 2012, Eichengreen and Gupta 2013). However, in the aftermath of the Global Crisis, some episodes of large depreciations appeared to have had little impact on exports, the depreciation of the yen being the main example. This has led some observers to question the effectiveness of lower exchange rates (Financial Times 2015).

Figure 1 focuses on a sample of Central Eastern European countries and provides some suggestive preliminary evidence. The figure shows that those countries that are more tightly integrated in German supply chains (Poland, Hungary, Czech Republic and Slovakia) saw a much stronger flattening of the relationship between real effective exchange rate (REER) growth and export growth to Germany than those that are more loosely integrated in German supply chains (Bulgaria, Latvia, Lithuania, Romania, and Slovenia). While other factors were certainly at play, this evidence suggests that cross-border production linkages may contribute to reducing the effectiveness of depreciations to boost exports.

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