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

The real effective exchange rate (REER) is one of the most cited statistical constructs in international macroeconomics. With the rising importance of offshoring and outsourcing, the standard measures are increasingly flawed. In addition, because different sectors within a country may participate in international production sharing at different stages, sector level variations are also important. We develop a theoretical framework to compute REER at both the sector and country levels. It nests the existing measures in the literature and addresses their shortcomings. As an application, we exploit the recently available World Input-Output Database (WIOD) to study the properties of the new measures of the REER for 40 countries, 35 sectors, over 1995-2011.