Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption

By A. Spilimbergo, Athanasios Vamvakidis. Social Science Research Network, 2000

51 citations recorded by the source corpus.

The real effective exchange rate is an aggregation of several bilateral real exchange rates with respect to other countries. The aggregation is usually done under the assumption of constant elasticity of substitution(CES) between products from different countries. We investigate the validity of this assumption by estimating manufacturing export equations for 56 countries over 26 years. We find that the hypothesis of CES is rejected and that the export equations that contain two real effective exchange rates (one in relation to OECD countries and one in relation to OECD countries and one in relation to non-OECD countries) perform on average considerably better than the traditional ones.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/52ec7d66e7341cbd86df5a34e06ec47b11139c54

Citations in the corpus

• A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation (2005, unknown): “Spilimbergo and Vamvakidis (2003) investigate whether the CES assumption over all countries is plausible, and find that it is helpful to distinguish between OECD and non-OECD countries in constructing effective-exchange-rate in- dices.”