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Makram Khalil
- 27 March 2023
- OCCASIONAL PAPER SERIES - No. 311Details
- Abstract
- Over the past decade, geopolitical developments – and the policy responses to these by major economies around the world – have challenged economic openness and the process of globalisation, with implications for the economic environment in which central banks operate. The return of war to Europe and the energy shock triggered by the Russian invasion of Ukraine in 2022 are the latest in a series of episodes that have led the European Union (EU) to develop its Open Strategic Autonomy (OSA) agenda. This Report is a broad attempt to take stock of these developments from a central banking perspective. It analyses the EU’s economic interdependencies and their implications for trade and finance, with a focus on strategically important dimensions such as energy, critical raw materials, food, foreign direct investment and financial market infrastructures. Against this background, the Report discusses relevant aspects of the EU’s OSA policy agenda which extends to trade, industrial and state aid measures, as well as EU initiatives to strengthen and protect the internal market and further develop Economic and Monetary Union (EMU). The paper highlights some of the policy choices and trade-offs that emerge in this context and possible implications for the ECB’s monetary policy and other policies.
- JEL Code
- F0 : International Economics→General
F10 : International Economics→Trade→General
F30 : International Economics→International Finance→General
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
F5 : International Economics→International Relations, National Security, and International Political Economy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
L5 : Industrial Organization→Regulation and Industrial Policy
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
- 6 November 2019
- WORKING PAPER SERIES - No. 2327Details
- Abstract
- This paper draws a causal link between the rise of global value chain participation and the decline of exchange rate pass-through to import prices over the last decades. We first present a structural two-country model in order to illustrate how participation in global value chains can impact exchange rate pass-through to import prices. In the model, the sensitivity of an economy's domestic-currency production costs to exchange rate changes rises as it participates more in global value chains by importing a larger share of its intermediate inputs. The increased sensitivity of the economy's domestic-currency production costs to exchange rate changes translates into a higher sensitivity of its domestic-currency export prices. The latter implies a reduction of the sensitivity of the economy's foreign-currency export prices – i.e. its trading partner's local-currency import prices – to exchange rate changes. Hence, an increase in the economy's global value chain participation implies a fall in its trading partner's exchange rate pass-through to import prices. We then provide empirical evidence in a cross-country panel dataset for the time period from 1995 to 2014 that is consistent with the mechanisms spelled out in the structural model. In particular, the data suggest that exchange rate pass-though to export prices is higher in economies which participate more in global value chains, and that exchange rate pass-though to import prices is lower in economies whose trading partners participate more in global value chains. Quantitatively, our estimates imply that the rise in global value chain participation can account for about 50% of the decline in exchange rate pass-through to import prices since the mid-1990s.
- JEL Code
- 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
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts