This blog post is based on de Soyres, Frohm, Gunnella and Pavlova (2018), “Bought, Sold and Bought Again: Complex value chains and export elasticities”, World Bank Policy Research Working Paper Series No. 8535.
Economics textbooks outline a clear-cut relationship between movements in a country’s exchange rate and its export volumes. When the currency depreciates, export volumes are expected to increase by some amount. By how much exports increase is called the exchange rate elasticity of exports. Yet, some recent episodes of significant exchange rate movements, such as those in Japan (2012–2014) and the United Kingdom (2007–2009), were not associated with very large movements in trade volumes.1 This perceived unresponsiveness of exports to exchange rate fluctuations has raised the question among some commentators as to whether the exchange rate elasticity of export volumes have changed or even become zero.