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Regional Effects of Exchange Rate Fluctuations

Christopher L. House, Christian Proebsting and Linda L. Tesar
Additional contact information
Christopher L. House: University of Michigan & NBER
Linda L. Tesar: University of Michigan & NBER

No 673, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: We exploit differences across U.S. states in terms of their exposure to trade to study the effects of changes in the exchange rate on economic activity at the business cycle frequency. We find that a depreciation in the state-specific trade-weighted real exchange rate is associated with an increase in exports, a decline in unemployment and an increase in hours worked. The effect is particularly strong in periods of economic slack. We develop a multi-region model with inter-state trade and labor flows and calibrate it to match the state-level orientation of exports and the extent of labor migration and trade between states. The model replicates the relationship between exchange rates and unemployment. Counterfactuals show that the high degree of interstate trade plays a dominant role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in following years. 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.

Keywords: Regions; exchange-rate fluctuations (search for similar items in EconPapers)
JEL-codes: F22 F41 F45 (search for similar items in EconPapers)
Pages: 42 pages
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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http://www.fordschool.umich.edu/rsie/workingpapers/Papers651-675/r673.pdf

Related works:
Journal Article: Regional Effects of Exchange Rate Fluctuations (2020) Downloads
Working Paper: Regional Effects of Exchange Rate Fluctuations (2019) Downloads
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