Tag: international finance and trade

A Difference of Perspective

So I’m reading Menzie Chinn’s helpful primer on different ways of calculating real effective exchange rates. And it’s got a bunch of pictures in it like this one, of various real exchange rates between the Indonesian rupiah and the dollar:

What do we see here? Well, when the dollar got strong in the early 1980s, the rupiah fell against it in real terms defined relative to export prices, but much less so in terms of domestic goods as measured by the CPI. Whereas when the rupiah fell in the Asian crisis, the real exchange rate fell whether you measured it by CPI or by export prices, albeit more by the latter. In other words, the strong dollar of the ’80s did not substantially increase American incomes relative to Indonesian, but the fall in the Rupiah in the ’90s did reduce Indonesian incomes relative to American. Interesting!

So when Chinn writes, “there are a number of interesting stylized facts to be gleaned from these figures,” I expect him to say something about these movements. But not a word! Instead, his discussion is all about the CPI-deflated series’ “more pronounced upward trend (or a less pronounced downward trend)” over the long run(the parenthetical is a nice concession to reality). “This pattern is often explained as the outcome of the Balassa-Samuelson model, wherein more-rapid productivity growth in the tradable sector than in the nontradable sector results in a rise in the relative price of nontradables.” So what Chinn sees in these figures is the rather dubious long-run pattern predicted by theory; he doesn’t notice the exciting ups and downs at all. And he’s one of the good ones.

“When the storm is long past, the ocean is calm again…”

EDIT: Now that I think about it, I’ve got the story of the ’80s wrong. The rupiah was pegged at that point, so when the dollar rose, the rupiah rose with it (apart from the two devaluations visible as downward spikes in the graph.) The decline in the export-price deflated series represents Indonesian exporters cutting their own-currency prices to remain competitive in world markets, something that US exporters, for various reasons, did not do. The larger point still holds.

Another One for the Pessimists

Elasticity pessimists, that is.

Following up on the long post on Krugman and China, here’s some interesting evidence on the non-responsiveness of trade flows to exchange rates. It’s a study of what happens to online book prices in the US and Canada when the exchange rate between the two countries change. In theory, when the exchange rate changes, online retailers should adjust local-currency prices so a given book costs the same in both countries; if they don’t, book buyers should buy from the country where prices are cheaper. As the authors say, online bookselling is “an activity where trade barriers are minimal, information is cheaply available and products are homogenous. If pervasive cross-border arbitrage was ever going to arise, it would be in sectors like online book retailing.” [1]

And if pigs were ever going to fly, it would be the most svelte and limber ones.

In fact, local-currency book prices don’t respond to exchange rate changes, so you get big differences in the price of books bought from, say, Amazon.com and Amazon.ca. (Yes, this takes shipping costs into account.) But people blithely go on on buying from their own country’s site: “The fact that books in Canada become cheaper following an appreciation of the US dollar should be reflected in higher sales for Canadian retailers. Using sales rankings as proxies for quantities, we find no evidence supporting such behaviour.”

Since they are real economists, they conclude that exchange rate movements need to be bigger and more persistent to affect trade. But if you’re some kind of Keynesian freak, you might take this as further evidence that exchange rates just aren’t that important to the current account balance.

[1] Besides these factors, online bookselling is also unusual in that the goods are bought directly from the exporting country. Most traded goods and services are sold, and therefore priced, in the importing country. So there’s the additional step of pass-through to prices further reducing the impact of exchange rates.