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Regional Effects of Exchange Rate Fluctuations

Christopher L. House, Christian Proebsting and Linda L. Tesar

Journal of Money, Credit and Banking, 2020, vol. 52, issue S2, 429-463

Abstract: We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade‐weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state‐level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross‐sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

Date: 2020
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https://doi.org/10.1111/jmcb.12758

Related works:
Working Paper: Regional Effects of Exchange Rate Fluctuations (2019) Downloads
Working Paper: Regional Effects of Exchange Rate Fluctuations Downloads
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