Value-Added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness

How is exchange rate pass-through (ERPT) measures affected by increasing participation in global value chains? This paper measures ERPT for value-added trade, where intermediate inputs are shared among sectors and countries in a back-and-forth manner for producing a single final product. Estimation of pass-through was done using World Input-Output Database (WIOD), World Economic Outlook (WEO), and OECD statistics. Empirically estimated findings suggest that ignoring the value-added trade will cause a systematic upward bias in the estimation of ERPT. From empirical investigation, it is also evident that there exists substantial heterogeneity in pass-through rates across sectors: sectors with high-integration into global market functions with a lower rate of exchange in comparison to sectors with less integration.