For each industry, we construct the trade-weighted exchange rates and export-weighted foreign real GDP growth by using the trade data compiled by Feenstra, Romalis, and Schott (2002) and the exchange rate and GDP data from the International Monetary Fund.
In both cases, a negative local shock (housing bust in Mian and Sufi 2012, a rising trade-weighted exchange rate for local manufacturing industries in our study) is assumed to reduce employment in local nontradable industries through a demand channel.
For countries with $pegs (including the GCC) or linked/managed exchange rates (including Ethiopia, Egypt and Angola), it will mean some further appreciation of trade-weighted exchange rates
and loss of competitiveness, potentially adding to macroeconomic imbalances.
The market's forecast for the RMB exchange rate has focused predominately on the RMB-dollar cross rate, ignoring the Chinese currency's trade-weighted exchange rates (or nominal effective exchange rate and real effective exchange rate).
Will it shift to target the RMB's trade-weighted exchange rate, or will it continue to target the RMB-U.S.
(7) We also construct three additional industry-specific trade-weighted exchange rates
following Goldberg (2004):
Morgan's indexes of real, trade-weighted exchange rates
, the dollar has fallen about 19 percent since the dollar peak in February 2002; Citigroup's index places the dollar depreciation since the February 2002 peak at a smaller 14 percent.
* At the national level, analyses of exchange rate moves often rely on aggregate trade-weighted exchange rates
. However, aggregate indexes can be less effective than industry-specific indexes in capturing changes in industry competitive conditions induced by moves in specific bilateral exchange rates.
For this reason, effective exchange rates are frequently termed trade-weighted exchange rates
. International trade, however, is not the only measure of international economic activity that could be used.
However, between 1975 and 1980, trade-weighted exchange rates
were relatively stable with respect to the U.S.
Other measures of trade-weighted exchange rates
developed by the International Monetary Fund (IMF) using wholesale prices or unit labor costs in the various countries to compute real exchange rates show the same general pattern.
Indexes of trade-weighted exchange rates
are also available from the authors.