Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154132
Authors: 
Bems, Rudolfs
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1699
Abstract: 
This paper proposes a methodology for tracing out the effect of intermediate inputs, including ‘processing trade’, on the link between external rebalancing and relative price adjustment. We find that neglect of inputs distorts parameterization of the traditional multi-sector macro model. Distortions affect the link between external rebalancing and relative price through several opposing channels. (1) Mismeasured imported inputs exaggerate economic openness and understate the price response to rebalancing. (2) Mismeasured domestic inputs increase cross- sectoral asymmetry in openness, leading to an overstated price response. (3) Mismeasured price elasticities tend to overstate the price response. (4) Distortions in model parameters interact to generate a sizable further understatement of the price response. Quantitative results show that the identified channels can each be significant in economic terms.
Subjects: 
external sector adjustment
intermediate inputs
real exchange rate
transfer problem
JEL: 
F32
F41
Document Type: 
Working Paper

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