Demand for Value Added and Value-Added Exchange Rates

We examine the role of cross-border input linkages in governing how international relativeprice changes influence demand for domestic value added. We define a novel value-addedreal effective exchange rate (REER), which aggregates bilateral value-added price changes,and link this REER to demand for value added. Input linkages enable countries to gaincompetitiveness following depreciations by supply chain partners, and hence counterbalancebeggar-thy-neighbor effects. Cross-country differences in input linkages also imply that theelasticity of demand for value added is country specific. Using global input-output data, wedemonstrate these conceptual insights are quantitatively important and compute historicalvalue-added REERs.