Global Value Chains and Effective Exchange Rates at the Country‐Sector Level

The real eective exchange rate (REER) is one of the most cited statistical constructs in open-economy macroeconomics. The conventional measures of the REER assume a world in which every country exports only final goods. With rising importance of oshoring and cross-border trade in intermediate goods, such measures are increasingly flawed. Taking into account international value chains, we develop a theoretical framework to compute REER at the both sector and country levels. The framework nests all existing measures in the literature and addresses their shortcomings. We exploit detailed trade data from the recently available World Input-Output Database(WIOD) spanning the period 1995-2011 to compute the REER for gross output as well as value added for 40 countries and 1435 country-sectors.