Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank’s Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

www.bank-banque-canada.ca

Staff Working Paper/Document de travail du personnel 2019-17

Estimating the Effect of Exchange Rate Changes on Total Exports

by Thierry Mayer and Walter Steingress

ISSN 1701-9397 © 2019 Bank of Canada

Bank of Canada Staff Working Paper 2019-17

May 2019

Estimating the Effect of Exchange Rate Changes on Total Exports

by

Thierry Mayer1 and Walter Steingress2

1 Département d’économie Sciences Po

Paris, France 75007 thierry.mayer@sciencepro.fr

2 International Economic Analysis Department

Bank of Canada Ottawa, Ontario, Canada K1A 0G9

wsteingress@bankofcanada.ca

i

Acknowledgements

We would like to thank Joshua Aizenman, Enrique Alberola, Raphael Auer, Ariel Burstein, Guillaume Gaulier, Philippe Martin and Fabrizio Zampolli for their useful comments and suggestions. Special thanks to our discussants Fernando Pérez-Cervantes and Mike Waugh. This research has received funding from the European Research Council (ERC) under the Grant Agreement No. 313522. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Canada.

ii

Abstract

This paper shows that real effective exchange rate (REER) regressions, the standard approach for estimating the response of aggregate exports to exchange rate changes, imply biased estimates of the underlying elasticities. We provide a new aggregate regression specification that is consistent with bilateral trade flows micro-founded by the gravity equation. This theory-consistent aggregation leads to unbiased estimates when prices are set in an international currency as postulated by the dominant currency paradigm. We use Monte-Carlo simulations to compare elasticity estimates based on this new “ideal-REER” regression against typical regression specifications found in the REER literature. The results show that the biases are small (around 1 percent) for the exchange rate and large (around 10 percent) for the demand elasticity. We find empirical support for this prediction from annual trade flow data. The difference between elasticities estimated on the bilateral and aggregate levels reduces significantly when applying an ideal-REER regression rather than a standard REER approach.

Bank topics: Econometric and statistical methods; Exchange rates; International topics JEL codes : F11, F12, F31, F32

Résumé

La présente étude montre que l’approche couramment employée pour estimer l’incidence des variations du taux de change sur les exportations totales, qui se base sur des régressions du taux de change effectif réel (TCER), implique des estimations biaisées des élasticités sous-jacentes. Nous proposons une nouvelle spécification reposant sur des régressions agrégées qui est compatible avec une dérivation des flux commerciaux bilatéraux par le modèle de gravité. Conforme à la théorie, cette approche débouche sur des estimations non biaisées lorsque les prix sont établis dans une monnaie internationale, soit la monnaie de l’économie dominante dans les échanges. Les auteurs utilisent la méthode de Monte-Carlo pour comparer les estimations des élasticités obtenues au moyen de ces nouvelles régressions d’un TCER dit « idéal » avec celles obtenues au moyen des spécifications communément utilisées dans les études impliquant le TCER. Les résultats indiquent que le biais est faible (autour de 1 %) pour le taux de change, et prononcé (autour de 10 %) pour l’élasticité de la demande. Ces observations sont confortées de manière empirique par les données sur les flux commerciaux annuels. L’écart entre les estimations des élasticités aux niveaux bilatéral et agrégé est bien moins important avec notre spécification qu’avec l’approche standard.

Sujets : Méthodes économétriques et statistiques; Taux de change; Questions internationales Codes JEL : F11, F12, F31, F32

Non-technical summary Regressions that explain total exports using real effective exchange rates (REER) are ubiquitous in applied policy work, but they are often based on incorrect aggregation of theory-consistent bilateral trade equations and lead to biased estimates of trade elasticities. Models calibrated with these elasticities will have predictions that are inaccurate by exaggerating the response of exports and, by extension, output following an exchange rate shock.

This paper shows that standard REER regressions produce biased results, documents the source of the bias and proposes a new alternative regression specification. Our specification is consistent with bilateral trade flows and micro-founded by the gravity equation. Total exports are a function of the real exchange rate and foreign demand deflated by the destination-specific price index, all denominated in the dominant international currency (i.e., the US dollar). Denominating prices according to the dominant currency paradigm (DCP) has the key implication that pass-through depends on the exchange rate variation relative to the international currency and not on the bilateral exchange rate. This allows us to split the change in the relative price between the exporter and the importer into two components each denominated in the international currency. This separation provides for theory-consistent aggregation and unbiased estimation of the trade and demand elasticities.

Simulations of the theoretical model imply that standard REER regressions lead to significant aggregation bias in the underlying elasticities. The bias in the trade elasticity is rather small (close to 1 percent), while the bias in the demand elasticity is more pronounced (close to 10 percent), and both increase with measurement errors.

We show that calibrating macroeconomic models with estimates obtained by using our new regression specification improves their fit and results in predictions consistent with microeconomic behavior in bilateral trade equations.

1 Introduction

Regressions that explain total exports with real effective exchange rates (REERs) are ubiquitous inapplied policy work,1 but their analytical structures are only loosely based on trade theory. Theseopen-economy “macro-level” regressions rely on monadic export equations where a country’s changein total exports is the dependent variable with the REER as the main variable of interest and an addi-tional control is considered for demand changes faced by the country. Despite considerable progressin the econometric aspects, the fundamental specification of McGuirk (1986), which derives its re-gression specification from Armington (1969), has remained virtually unchanged over the past fewdecades.2 During the same period, considerable progress has been made in modeling the “micro-level” foundations of dyadic (bilateral) trade equations, which are called gravity equations. A seminalpaper in the gravity literature is Anderson and Van Wincoop (2003), which is also based on Arming-ton (1969). In the gravity literature, little attention has been given to estimate the impact of changesin the exchange rate (see Anderson et al. (2016) as a notable exception).3 In this paper, we reconnectthe two strands of the literature.

We start by assessing whether the standard approach of monadic macro regression is compat-ible with the micro-founded gravity equation that predicts a very precise functional form for anestimation explaining bilateral flows. Similar to Imbs and Méjean (2015), our paper is methodolog-ical in that we seek to derive the appropriate monadic aggregation of bilateral flows and compareour new “ideal-REER” approach with typical regressions from the standard REER literature. Differ-ences arise due to the fact that the ideal-REER regression is based on proportional changes,4 whileMcGuirk (1986)’s REER is based on partial derivatives (log changes). In the standard REER regres-sion total exports are a log linear function of log changes of the real effective exchange rate and foreigndemand. On the other hand, the aggregate export equation that follows a structural gravity approachimplies a log-linear function of log changes in the real exchange rate (RER) and differences in foreigndemand deflated by the destination-specific price index. The standard REER approach constitutesan approximation, which holds for small changes, and causes an aggregation bias.

The aggregation of bilateral trade flows inherently depends on the currency denomination. Inour baseline gravity model, prices are set in a common international currency following the domi-

1Global projection models of central banks and international policy institutions (for example, Jakab et al. (2015)), theliterature on global VAR models (Di Mauro and Pesaran (2013)) as well as on global imbalances (see, among others, Ob-stfeld and Rogoff (2005) and Lane and Milesi-Ferretti (2012)) rely on REER equations and their elasticities to summarizethe trade linkages between the different regions in their model.

2Debate and progress in econometric aspects of such work is still ongoing, see Chinn (2006) for a primer on alterna-tive measures of REER. More recently, Bennett and Zarnic (2009) introduce product heterogeneity and services exports.Bayoumi et al. (2013) and Bems and Johnson (2017) construct REER indexes based on value-added trade to account forglobal value chains. Patel et al. (2017) build on Bayoumi et al. (2013) and Bems and Johnson (2017) to study how inputlinkages affect REER measurement in a multi-sector economy.

3Most of the interest has been geared towards measuring the impact of bilateral trade costs, such as regional tradeagreements (RTAs), tariffs and membership at the WTO. See Head and Mayer (2014) for an overview.

4Often referred to as exact hat algebra. See Arkolakis et al. (2012).

2

nant currency paradigm (DCP) as in Casas et al. (2017). DCP implies that the exchange rate variationrelative to the international (dominant) currency and not the bilateral exchange rate determines pass-through. As a result, we can split the relative price between the exporter and the importer into thesum of an exporter-specific (the RER) and an importer-specific component (foreign demand deflatedby the importer’s price index) each denominated in the international currency. This separation pro-vides for theory-consistent aggregation and unbiased estimation of the trade and demand elasticities.If prices are set in the producer’s currency (producer currency pricing (PCP)) or in the local currency(local currency pricing (LCP)), the pass-through depends on the bilateral exchange rate and estima-tion of the aggregate elasticities without bias is only possible if pass-through is complete. Extendingthe model to allow markups to vary across trading partners reduces the response of prices to theexchange rate change and lowers the bias in both the demand and the trade elasticities.

To reveal the importance of theory-consistent aggregation for parameter inference, we resort totheoretical model simulations and quantify how departures from the model’s strict form can generatebiases in trade and demand elasticity estimates. To that purpose, we use the Dekle et al. (2007) ver-sion of the structural gravity model (compatible with most of the commonly used theoretical modelsof international trade). Monte Carlo simulations show that while there is discordance between theideal-REER and standard REER regressions, the magnitude of the biases in elasticities are dependenton the precise regression specification as well as the underlying assumptions on the exchange rateshock. Overall, the bias in the trade (exchange rate) elasticity is rather small (close to 1 percent),while the bias in the demand elasticity is more pronounced (close to 10 percent) and increases withmeasurement errors. If, instead, we re-estimate the same specifications and denominate trade inthe producer currency, the aggregation bias increases significantly, the overall fit of the regressionis lower, the point estimates of the elasticities are smaller and the standard errors are larger in allspecifications.

Next, we build on the theoretical basis of our paper and compare the empirical performanceof our ideal-REER with the standard REER approach. We use annual bilateral trade and price datafor 25 countries that are part of the Bank for International Settlements (BIS) narrow effective ex-change rate indexes (see Klau and Fung (2006)) for the period 1964 to 2014. As a first step, we followBoz et al. (2017) and run exchange rate pass-through regressions to test (1) whether pass-through iscomplete, and (2) whether the pass-through depends on the currency denomination of export andimport prices. Our results show that, overall, pass-through is incomplete (with an average coeffi-cient of 0.16) and both exporter and importer prices vary mainly with the US dollar supporting thedominant currency paradigm. In the second step, we aggregate bilateral trade flows denominated inUS dollars and estimate the trade and demand elasticities for both the ideal-REER and the standardREER regression specifications following the DCP. Evidence based on the pooled sample across allcountries, in addition to country-specific regressions, corroborate the simulation results. The differ-ence between the elasticities estimated on the bilateral and the aggregate levels reduces significantlywhen applying an ideal-REER regression rather than the standard REER approach.

3

Taken together, these results highlight two additional advantages of the dominant currencyparadigm, which currently is the yardstick used in evaluating pricing and exchange rate pass-through(see Boz et al. (2017) and Casas et al. (2017)). First, DCP allows for consistent aggregation of micro-level founded bilateral trade equations with a minimum set of assumptions on the pricing behaviorand, second, the estimation performance of aggregate regressions improves significantly when de-nominating the variables in US dollars.

Our paper contributes to the macroeconomic literature on exchange rate indexes as a measureof price competitiveness. The REER is an important statistical indicator, produced by internationalagencies such as the IMF (see Bayoumi et al. (2005)), the BIS (see Klau and Fung (2006)) and manycentral banks (see Schmitz et al. (2011) for the ECB and Barnett et al. (2016) for the Bank of Canadareferences). We see our analysis as complementary to the recent papers that study the theoreticalfoundations for these indexes. These papers’ focus lies more in introducing global linkages into themeasurement of competitiveness (see Bayoumi et al. (2013), Patel et al. (2017) and Bems and Johnson(2017)). We show that using the REER to estimate the aggregate response of exports leads to biasedestimates of the underlying elasticities. The bias exists due to functional form assumptions, currencydenomination and inconsistent weighting of trade flows in the aggregation of bilateral trade flows.

Our analysis also speaks to the old macroeconomic literature on estimating trade elasticitiesstarted by Orcutt (1950), Houthakker and Magee (1969) and Goldstein et al. (1985) and recent con-tributions by Spilimbergo and Vamvakidis (2003), Freund and Pierola (2012), Bussière et al. (2014a)and Ahmed et al. (2016). All of these papers rely on effective exchange rates to estimate demand andtrade elasticities. Our results warrant caution in the use of these estimates for counterfactual policies,particularly in the case of the demand elasticity, where bias can be significant. As an alternative, wesuggest our ideal-REER regression framework to mitigate these concerns. These conclusions also ap-ply to studies that use aggregate time-series data to estimate exchange rate pass-through coefficientssuch as Campa and Goldberg (2005), Vigfusson et al. (2009) and Bussière et al. (2014b).

The remainder of the paper is structured as follows. Section 2 derives the gravity-compatibleaggregate export equation in the partial as well as in the general equilibrium. Section 3 describesthe standard empirical approaches used in the applied literature and discusses the functional formdifferences with respect to the gravity approach. Section 4 quantifies the biases of the different spec-ifications using Monte-Carlo simulations of partial as well as general equilibrium counterfactuals ofexchange rate shocks. Section 5 discusses the importance of the underlying pricing behavior andcurrency denomination. Section 6 introduces the data and provides empirical evidence on the keypredictions of our theoretical framework. Section 7 concludes.

4

2 The gravity approach

We start with a description of the structural gravity equation based on Head and Mayer (2014) de-rived from the Armington model. The central feature of the Armington model is that it is not only atthe heart of the gravity equation literature but also forms the basis of the real exchange rate regres-sions as in Artus and McGuirk (1981), McGuirk (1986) and Spilimbergo and Vamvakidis (2003).

2.1 Structural gravity

Consider a world economy consisting of N countries. Each country is endowed with Qn units ofa distinct good. In each country, the representative agent has Constant Elasticity of Substitution(CES) preferences. Trade between countries is costly and takes the form of iceberg trade costs. Inorder to sell one unit of good i in country n, exporters from country i have to ship τni ≥ 1 units.Trade within the country is costless, i.e., τii = 1. To prevent arbitrage opportunities, we assumethat trading bilaterally between i and n is always cheaper than trading via an intermediate countryk ( τnkτki ≥ τni for ∀i, j, k). Note that given country i’s endowment Qi and total income Yi, we canexpress supply as Si = Yi/Qi, the corresponding producer price of good i as Pii = Si and the pricecharged to consumers in country n to be Pni = τniSi. Given our assumptions, the gravity equation isa product of the share of expenditure that importer n allocates on goods from exporter i, πni, and theoverall expenditure, Xn. Following Head and Mayer (2014), πni can be expressed in the followingmultiplicative separable form:

πni =Siφni

Φnwhere Φn =

N

∑`=1

(S`φn`) and Ωi =N

∑`=1

φ`iX`

Φ`, (1)

where φni captures the bilateral accessibility of n to exporter i and is a function of iceberg trade costs,Φn represents the multilateral resistance term and Ωi represents the weighted sum of the exportercapabilities.

In order to quantify potential estimation biases and to produce counterfactual simulation esti-mates of the structural gravity model, we need to specify the underlying supply structure. In thispaper, we opt for the Ricardian Comparative Advantage specification with intermediate inputs fromDekle et al. (2007) based on Eaton and Kortum (2002) and Alvarez and Lucas (2007). In this model,each country produces a large number of tradable intermediate goods that are homogeneous acrosscountries. Productivity z differs across goods and is assumed to follow a Fréchet distribution witha cumulative distribution function of exp(−Tiz−θ), where Ti is a technology parameter and θ deter-mines the amount of heterogeneity in the productivity distribution. For each intermediate good z,buyers choose the lowest cost supplier in the world. Aggregating across all goods, assuming thatfactor prices are denominated in the domestic currency as well as assuming complete pass-through,the expenditure share that buyers in n spend on goods from i can be written as

5

πni =Ti

(riw

βi p1−β

i τni

)−θ

(rnPn)−θ

where P−θn =

N

∑`=1

Tl

(rlrn

wβl p1−β

l τn`

)−θ

, (2)

where wi is the wage paid to workers in i, pi is the price of tradable intermediate goods, ri is thenominal exchange rate that converts domestic prices into a common international currency (the USdollar, for instance) and β is the share of intermediate goods in the production of manufacturinggoods. Comparing equation (2) to equation (1) shows that the three structural gravity terms are given

by Si = Ti

(riw

βi p1−β

i

)−θ, φni = τ−θ

ni with θ as the trade elasticity and the multilateral resistance term

in international currency Φn = (rnPn)−θ.

Asserting a market clearing condition implies that total output in i, Yi, corresponds to totalspending, Xi. With labor as the sole factor, the value of production in local currency in the countryof origin is given by Yi = wiLi. Following Dekle et al. (2007), the market clearing conditions for themanufacturing sector in international currency become

riwiLi = ∑n

πni (wnLn + rnDn) ,

where Di is the overall trade deficit in local currency.5

At this point, it is important to note that while we chose the Eaton-Kortum variant of the gravitymodel as the underlying theoretical foundation, all other theoretical models that adhere to structuralgravity are compatible with the following analysis on the estimation bias. The main difference willbe the underlying implications on the micro-structure and its corresponding interpretations.

2.2 Counterfactual analysis

To produce counterfactual analysis, we use the exact hat notation, see Dekle et al. (2007) and Arko-lakis et al. (2012), to derive the aggregate export equation. More precisely, hats denote the ratioof post-shock to pre-shock values. We start by assessing the change in bilateral exports and thenaggregate to obtain the change in total exports. For bilateral exports of country i to country n ininternational currency, we have

Xni ≡X′ni

Xni,

where X′ni is bilateral trade after the change and Xni is the value before any change. The resulting

change in total exports after the policy change is simply the sum over all import countries with theexception of country i’s home market. Furthermore, we can decompose the change in total exports(Ei) as the sum of changes in the expenditure shares and the aggregate expenditure in international

5For exposition purposes we do not present the derivations of the market clearing condition and refer to Dekle et al.(2007) for the details.

6

currency across all importing countries weighted by the initial share of exports going to country n(ωni = Xni/Ei):

Ei =1Ei

∑n 6=i

π′niX

′n = ∑

n 6=iωniπniXn (3)

This equation is extremely general and simply states that the change in a country’s total exportscorresponds to the weighted sum of all proportional changes in bilateral exports. Weights are theinitial share of each bilateral flow in total exports. The change in each bilateral flow can have twoorigins: i) an increase in total expenditure in destination n, or ii) a change in competitiveness ofcountry i relative to all other trading partners of n.

As a policy shock, we consider an exogenous change in the nominal exchange rate of countryi, ri, which is independent of the exchange rate in all other countries. The shock to ri acts like ashifter of delivered prices to the consumer (which assumes complete pass-through at this stage).6

Without migration or other affects to the population, we have changes in output given by changesin the nominal exchange rate and wages, riwi = Yi. Assuming that technology and trade costs areunaffected by the shock, the implied change in the bilateral trade shares resulting from a change inthe nominal exchange rate takes the following form:

πni =

(riw

βi p1−β

i

)−θ

(rnPn

)−θ, (4)

where the change in the price index of country n is equal to the change in country i’s exchange ratetimes the weight of country i in country n’s import basket,

P−θn =

N

∑k=1

πnk

(rkrn

wβk p1−β

k

)−θ

. (5)

Plugging the calculated trade shares back into the market clearing condition, one can solve forthe changes in production of each country of origin. The resulting changes in equilibrium wages (wi)paid in local currency are

riwiYi = ∑n

πni

(riw

βi p1−β

i

)−θ

∑k πnk

(rkwβ

k p1−βk

)−θ

(rnwnYn + Dn) . (6)

Note that, in this model, a nominal exchange rate shock will affect relative prices and lead tochanges in trade flows. The reason is that we fix the trade deficit in international currency, i.e., inUS dollars. Given this assumption, the wage adjustment will not be one-to-one with exchange ratechange and depends on the dollar value of the current account deficit.7 As such, this scenario will be

6In this model the exchange rate shock is a nominal shock that changes the unit of account of prices.7Alternatively, if one assumes that the ratio of the current account deficit to GDP is constant or trade is balanced

7

instructive to understand potential aggregation biases when constructing an effective exchange ratein general equilibrium.8

To obtain the export equation, we can simply apply equation 4 into equation 3. Taking logs andassuming that prices are set in the international currency,9 we can write the log change in exports asa function of the log change in the real exchange rate (RERi) and foreign demand as

ln Ei = −θ ln ˆRERi + ln ∑n 6=i

ωni

(Xn(

rnPn)−θ

). (7)

Xn = rnwnYn + Dn represents changes in absorption and the real exchange rate is defined as thechange in the nominal exchange rate and the change in the producer price in the exporting countryin local currency, i.e., changes in intermediate input prices and wages, ˆRERi = riPii = riw

βi p1−β

i .Equation 7 implies that, under the assumption of a constant elasticity of substitution, there is

no aggregation bias in aggregate macro exchange rate regressions. In order to obtain these unbiasedestimates, one needs to regress the log of the change in nominal exports on the log of the change inthe real exchange rate and the foreign demand deflated by changes in the importer’s price index:

ln Ei = βRER ln ˆRERi + βX ln ∑n 6=i

ωni

(Xn(

rnPn)βRER

)+ εi (8)

βRER will be the estimated exchange rate elasticity, βX the corresponding demand elasticity and εi

the error term. However, to our knowledge, there is no paper running regressions based on equa-tion 8. Instead, the literature focuses on trade-weighted real (or nominal) effective exchange rateregressions, which aggregate bilateral exchange rates to a single country-specific indicator. Next, wediscuss the theoretical underpinnings of the effective exchange rate regressions used in applied workand relate them to the structural gravity framework.

(Dn = 0,∀n), then changes in the exchange rate will be one-to-one offset by changes in the local wage and have no realeffects. In this case the equilibrium condition looks as follows:

riwiYi = ∑n

πni

(riw

βi p1−β

i

)−θ

∑` πn`

(rlw

βl p1−β

l

)−θ

(rnwn (Yn + Dn))

The appendix discusses this point in more detail and provides a proof that a nominal exchange rate shock has realeffects when fixing the current account deficit in international dollars.

8Anderson et al. (2016) consider an alternative approach that leads to changes in relative prices across countries after anominal exchange rate shock. They assume an exogenous degree of incomplete exchange rate pass-through into importprices (ri = rρn

i where ρn is the exogenous degree of import pass-through). However, in this case aggregation of thebilateral flows to an effective exchange rate without bias will not be possible. The change in the exporter’s price willdepend on the importing country n and cannot be separated from the demand effect as in equation 7.

9 We discuss the importance of this assumption together with alternative pricing assumptions on the exchange ratepass-through in section 5.

8

3 The real effective exchange rate approach

McGuirk (1986) is the standard reference that describes the methods used to construct an aggre-gate price competitiveness indicator, or the real effective exchange rate. This indicator attempts tomeasure a country’s price change in the tradable sector relative to those of other countries after con-verting each of them into a common currency. In this section we show that aggregation based on theeffective exchange rate relies on a functional form approximation and that using this indicator forparameter inference will lead to bias in the estimated coefficients.

The theoretical foundations of the McGuirk (1986) approach rests on the Armington (1969) as-sumption of imperfect substitutability between goods and a constant elasticity of substitution (CES),which is consistent with structural gravity. The starting point is writing the bilateral import demandfunction of country n for goods from country i , Xni, as a function of total expenditure Xn and thebilateral shares defined in equation 2. Taking the log and considering the change from the initialequilibrium to the new equilibrium ln Xni = 4 ln Xni = (ln X′ni − ln Xni), we get

ln Xni = −θ ln(

ri

rn

Pni

Pn

)+ ln Xn, (9)

where ln Pni denotes the change in the price that exporting country i charges to consumers in coun-try n and ln Pn is the change in the price index of the importing country n, both denoted in localcurrency.10 Concerning the changes in the importing country’s price changes, McGuirk (1986) ap-proximates the log change of the importer’s price as a weighted average of the log changes in theproduction prices:

ln rnPn =K

∑k=1

πnk ln(rkPkk

), (10)

where Pkk represents the change in producer price index in country k and πnk is the expenditureshares of country n. Using further simplifications outlined in the appendix, we can substitute theimport price index in equation 9 with equation 10 and aggregate across all importing countries. Todo so, we sum the bilateral trade flows over all markets (excluding the home market) by weightingthe flows by the share of i’s output sold in each market:

∑n 6=i

ωni ln Xni = −θ ∑n 6=i

∑k 6=i

ωniπnk ln(

ri

rk

Pii

Pkk

)+ ∑

n 6=iωni ln Xn,

where the weight ωni is defined as the share of export revenues of country i that comes from salesin destination n with respect to total export sales. Next, we define the double-weighted real effectiveexchange rate (REER) as follows:

10Based on the model in section 2 and the assumption that trade costs are fixed, the change in the foreign price equalsthe change in producer prices, which equals the change in marginal costs ln Pni = ln Pii = ln

(wβ

i p1−βi

).

9

ln ˆREERi = ∑n 6=i

∑k 6=i

ωniπnk ln(

ri

rk

Pii

Pkk

)(11)

and write the standard REER regression used in the literature as

ln Ei = βREER ln ˆREERi + βX ∑n 6=i

ωni ln Xn + εi, (12)

where βREER is the estimated exchange rate elasticity of specification and βX the demand elasticity.εi represents the estimation error. The estimation produces unbiased estimates if the exchange rateelasticity (βREER) is equal to θ and if the foreign demand elasticity (βX) is equal to one.

3.1 Aggregation bias

The essential difference between the REER regression in equation 12 and the ideal-REER regressionimplied by gravity in equation 7 is that the change in total exports is approximately equal to theweighted sum of the bilateral export changes, i.e., ln Ei ≈ ∑n 6=i ωni ln Xni. To see the differencebetween the two approaches explicitly, we rewrite the REER in equation 9 as a weighted average ofthe bilateral real exchange rate without substituting for the importer’s price index using equation10. The resulting change in the REER is simply the log difference between the changes in the realexchange rate (RER) of exporter i and a weighted average of the price index changes of every tradingpartner:

ln ˆREERi = ln(

Pii ri)− ∑

n 6=iωni ln

(Pnrn

). (13)

Substituting the implied REER in equation 13 back into the standard REER regression definedin equation 12, we can compare the ideal REER regression in equation 7 with the standard REERregression:

−θ ln(

Pii ri)+ ln ∑

n 6=iωni

(Xn(

Pnrn)−θ

)≈ −θ

(ln(

Pii ri)− ∑

n 6=iωni ln

(Pnrn

))+ ∑

n 6=iωni ln Xn

Canceling the RERi on both sides and rewriting the destination-specific terms, we can applyJensen’s inequality and arrive at the following inequality:11

ln ∑n 6=i

ωni

(Xn(

Pnrn)−θ

)≥ ∑

n 6=iωni ln

(Xn(

Pnrn)−θ

)(14)

11The result follows from Jensen’s inequality and parallels the proof of the inequality of arithmetic and geometricmeans, more formally, ln ∑n 6=i ωnixn ≥ ln ∏n 6=i

(xwni

n).

10

Equation 14 states that the log of total exports (the LHS) is larger than the weighted average of thebilateral trade flows (the RHS). The difference between the two expressions is related to the Theilinequality index12, which measures the heterogeneity in the destination-specific changes. Intuitively,the Theil index and the resulting bias will be larger the higher the variance is from destination-specific shocks. In the extreme case, if prices and demand change only in one destination, the Theilindex is at a maximum value and the estimation biases in the demand and exchange rate elasticities ofthe REER approach will be at their largest.13 On the other hand, when the price and demand changesin all destinations are the same, the Theil index will be zero and both regression specifications willlead to the same elasticities. In the simulation section, we quantify the estimation biases as a functionof the exchange rate shocks and the trade elasticity. Before, we discuss other real effective exchangerate regression specifications found in the literature starting with an alternative weighting scheme.

3.2 Weighting scheme

The effective exchange rate calculated by policy institutions such as the IMF (Bayoumi et al. (2005)),the European Central Bank (ECB) (Schmitz et al. (2011)) and the Bank for International Settlements(BIS) (Klau and Fung (2006)) follows the double weighting approach approach of McGuirk (1986)but uses slightly different weights. Their calculations include the sales of the exporter country in itsdomestic market. The REER is defined as follows:

ln ˆREERIMFi = ∑

k 6=iTWki ln

(ri

rk

Pii

Pkk

),

and the implied weights are given by

TWki =N

∑n=1

ψniπnk, (15)

where ψik is the export weight including the home market shares. ψik relates to our export weightsin the following way:

ψni =Xni

∑Nn=1 Xni

= ωni

(∑n 6=i Xni

∑Nn=1 Xni

)However, as Bayoumi et al. (2005) note, the weights implied by equation 15 do not sum to 1. As

a result, the weights are normalized leading to the following definition:14

12The Theil L entropy index is defined as TL = ∑Ni=1 wi ln

(µxi

), where wi is the importance weight of observation i’s

characteristic xi. The sum of wi over all observations i equals one. µ is the corresponding arithmetic mean.13New Zealand is a good example. An exchange rate shock to the New Zealand dollar will change prices and demand

in Australia but is likely to have little impact on other parts of the world.14The appendix provides details on the derivations.

11

TWki =∑N

n=1 ψniπnk

∑Nn=1 ψni (1− πni)

(16)

The denominator of equation 16 ensures that TWki sums to 1. The resulting estimation equation isthen given by

ln Ei = βREER ln ˆREERIMFi + βX ∑

k 6=iωni ln Xn + εi, (17)

where the weights for the foreign demand continue to be the export shares ωni. We do not have anyprior on the direction of the bias in the demand (βX) and the exchange rate elasticity (βRER) causedby the weighting scheme and refer to section 4 for the quantitative simulation results.

3.3 Multilateral resistance term

The value of exports depends not only on the country’s export price and foreign demand, but alsoon the willingness of foreigners to substitute domestic for foreign goods. The multilateral resistanceterm Φn defined in equation 1 picks this idea up. This subsection discusses the estimation bias in thedemand and trade elasticities provoked by the absence of the multilateral terms in the ideal-REERand the standard REER regression approach.

The first point to note is that the change in the multilateral resistance term summarizes all theprice changes due to variations in the competitiveness of exporter n as well as changes in country i’sown competitiveness in its domestic market:

Φn =(rnPn

)−θ=

N

∑k=1

πkn(rkPkk

)−θ (18)

In our framework, the price change in exporter’s competitiveness Pkk is simply given by thechange in the exporter’s per unit costs of production (wages and intermediate input prices) and theexchange rate. The parameter θ describes consumers’ willingness to substitute domestic for foreigngoods following a price change. Omitting the multilateral resistance term in the export equation, werun the following regression:

ln Ei = βRERln(

Pii ri)︸ ︷︷ ︸

ˆRERi

+ βX ln ∑n 6=i

ωniXn + ui (19)

Equation 19 implies that the multilateral resistance term enters the error ui = − ln ∑n 6=i ωni(rnPn

)−θ+

εi. The omitted variable bias in the estimate of θ depends on the co-variance between the change inthe exporter’s price and the multilateral resistance term:

12

βRER = −θ +Cov

(ln riPii, ln ∑n 6=i ωni

(rnPn

)−θ)

Var(ln riPii

) (20)

In general, the multilateral resistance term will be positively correlated with changes in the realexchange rate. The following example with the US as the exporter and Canada as the importer illus-trates this correlation. Suppose that the US dollar depreciates (ri ↑), which increases competitivenessof US exports in all destinations. Depending on the Canadian expenditure share on goods from theUS, this change lowers the Canadian price index directly by making US goods cheaper and indirectlyby reducing Canadian producer prices through lower costs for intermediate inputs. More generally,countries with the highest expenditure share on US goods (Canada and Mexico) will experience thelargest decline in prices. Given that the multilateral resistance term in equation 18 depends neg-atively on the price index, the correlation with the exchange rate shock is positive and the tradeelasticity will be biased towards zero.

Similarly, the bias in the demand elasticity depends on the co-variance between the change inthe foreign demand and the multilateral resistance term in the error:

βX = 1−Cov

(ln ∑n 6=i ωniXn, ln ∑n 6=i ωni

(rnPn

)−θ)

Var(

ln ∑n 6=i ωniXn

) (21)

In this case we expect a downward bias in the demand elasticity due to a positive correlationbetween the multilateral resistance term and foreign demand. The reasoning parallels the correlationwith the real exchange rate. An exchange rate depreciation of country i, ri, reduces the price index indestination n and increases the multilateral resistance term. The lower prices increase demand andimply a positive correlation between the multilateral resistance term and foreign demand.

So far, we have shown that if the assumptions of structural gravity hold, one can consistentlyaggregate bilateral exchange rate changes and estimate the trade and demand elasticities using theaggregate export equation. However, the empirical literature follows an alternative approach basedon real effective exchange rates that essentially approximates the aggregate change of exports usinga weighted average of changes in bilateral exports. As we have shown, this approximation willlead to an aggregation bias in the estimated elasticities if the underlying exogenous shock causesa heterogeneous response in bilateral trade. We have also discussed alternative approaches in theapplied literature that are based on differences in the weighting scheme as well as highlighted theimportance of accounting for the multilateral resistance term. In the following section, we simulate astandard structural gravity model in order to quantify the magnitude of the estimation biases whenusing real effective exchange rate regressions for parameter inference.

13

4 Simulation results

Having described the underlying micro-structure, we quantify potential estimation bias in variousexchange rate regression specifications using the data set provided by Dekle et al. (2007). These datacomprise bilateral trade flows in manufactures, GDP as well as balance of payments information for39 countries (plus the Rest of the World) in the year 2004.15

1. Ideal-REER

The first specification captures the real exchange rate model implied by the exact hat algebra inequation 8. This ideal-REER regression is the benchmark specification and will produce unbiasedestimates of the trade elasticity (β1

RER = −θ) and the foreign demand elasticity (β1X = 1) with no

error. Note that the regression equation 8 is non-linear because the trade elasticity is unknown. Weestimate the relevant elasticities using SILS (structurally iterated least squares) as described in Headand Mayer (2014).

2. Multilateral resistance (“Gold medal mistake”)

An important problem when estimating REER regressions is the presence of the multilateral resis-tance term. This term captures the implied price changes in the rest of the world due to policy shocks.We assess the importance of the omitted variable bias due to the absence of the multilateral terms byestimating equation 19.

3. Real effective exchange rate à la McGuirk

The third specification quantifies the aggregation bias when estimating the double-weighted REERregression in equation 12.

4. Approximation via log changes

One difference between the double-weighted REER regression à la McGuirk and the ideal-REERregression is that the multilateral resistance term deflates export prices rather than foreign demand.To assess the importance of this functional form assumption, we approximate the baseline regressionwith log changes and keep the non-linear form of equation 8:

ln Ei = βRER ln ˆRERi + βX ∑n 6=i

ωni

(ln Xn

ln(rnPn

)βRER

)+ εi (22)

Similar to the baseline specification, we estimate equation 22 non-linearly using SILS.

15The bilateral trade share matrix is a sufficient statistic for a set of parameters including trade costs. For further details,please refer directly to Dekle et al. (2007).

14

5. Real effective exchange rate with different weights

The fifth specification quantifies the estimation bias when running a double-weighted REER regres-sion and using an alternative weighting scheme, i.e., IMF weights, as defined in equation 17.

For each of the 5 specifications, we consider two types of policy experiments. The first one isthe partial equilibrium approach (modular trade impact (MTI) counterfactual), where we consideran exogenous change in the nominal exchange rate and assume that wages do not adjust (however,intermediate input prices do adjust). In the second experiment, the general equilibrium trade inte-gration (GETI) counterfactual, wages and prices will fully adjust following a shock to the nominalexchange rate.

4.1 Modular Trade Impact (MTI) counterfactual

The MTI counterfactual considers changes in prices and leaves wages constant by allowing the tradedeficit to change. This case is identical to the one considered by McGuirk (1986). This approachallows us to abstract from income changes in the interpretation of the bias in the exchange rate elas-ticity. The counterfactual consists of a random nominal exchange rate shock (ri) specific to country i(France, for example), keeping the exchange rates of all other countries fixed. Each shock is drawnfrom a normal distribution with a variance of 0.1 (equivalent to a 10 percent appreciation or depreci-ation). For every country, we run 100 different exchange rate shocks to obtain a sample of 39x39x100data points. Next, we run a cross-section OLS regression for each replication and record the demandand exchange rate coefficients. Table 1 contains the results.

The top value in Table 1 reports the average exchange rate and demand elasticity for the 3900estimated coefficients. The second row corresponds to the implied bias of the estimate, i.e., the dif-ference between the sample mean and the true value of the coefficients. The third row shows thestandard deviation of the estimates. Lastly, the fourth row gives the square root of the estimatedmean squared error (MSE), our selection criteria for the specification with the lowest aggregationbias. The first column shows the results for the baseline specification. The estimates are equal to thetrue values of the elasticities (−4 and 1, respectively) and therefore unbiased.16 All other specifica-tions lead to a bias. In general, the bias is more pronounced for the demand than for the exchange rateelasticities. The MSE for the demand elasticities is significantly larger than the MSE for the exchangerate elasticities. The omission of the multilateral resistance term in Specification 2 (the “Gold medalmistake”) shown in column (2) produces the largest biases for the exchange rate elasticity (-3.872).The specifications with the smallest bias are the double-weighted REER approach à la McGuirk incolumn (3) and the log approximation of the baseline specification in column (4). The point estimate

16In the baseline simulation we calibrate θ = 4, which is a common value found in the literature (see Simonovska andWaugh (2014)). However, the magnitude of the bias does not depend on the level of this elasticity. Table 9 in the appendixcontains simulation results for when the elasticity is θ = 0.8.

15

Table 1: MTI simulated elasticities of country-specific random exchange rate shocks

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5)

Exchange rateMean -4 -3.872 -4 -4 -3.957Bias 0 .128 0 0 .043Std dev. 0 .247 .004 .003 .08MSE 1/2 0 .278 .004 .003 .091

Foreign demandMean 1 0 0 1.002 0Bias 0 0 0 .002 0Std dev. 0 0 0 .039 0MSE 1/2 0 0 0 .039 0

Notes: The sample consists of 39 countries and each country receives 100 random exchange rate shocks. The total numberof estimated exchange rate and demand elasticities is 3900 for each of the 5 different specifications. The top cell labeled"Mean" reports the sample mean of the respective estimates for each type of elasticity. The rows labeled "Bias" give theestimated bias, where est. bias = sample mean - true value. Rows labeled "Std Dev." give the sample standard deviationof the 3900 point estimates. Rows labeled "MSE1/2" give the square root of the estimated mean squared error (MSE),where estimated MSE = (est. bias)2 + (std dev)2.

of the exchange rate elasticity is -4 with a standard deviation smaller than 0.001. The coefficient ofthe demand elasticity for the log approximation is slightly larger than 1 with 1.002. Finally, the lastcolumn (5) shows the bias in the case of alternative weights, which overestimates the exchange rateelasticity (-3.957).

In addition to the average elasticities reported in table 1, figure 1 plots the country-specific biasin the exchange rate elasticity as a function of the exchange rate shock. The magnitude of the biasincreases in the size of the exchange rate shock in all specifications. We also observe that in the caseof the “McGuirk” (sub-figure b) and the “log-approximation” (sub-figure c) that the direction of thebias is the opposite of the exchange rate shock (a depreciation leads to a downward bias while anappreciation leads to an upward bias). The other two scenarios show the importance of using theadequate functional form. Omitting the variation in the weighted average of the competitor’s priceindex (scenario “Gold medal mistake”) or having the wrong weighting scheme (scenario “Alterna-tive weights”) leads to larger biases for countries that have more important implications in the inter-national trading system. For example, the United States has the largest bias because it is, on average,the most important trading partner for the countries in our sample and, as a result, an exchange rateshock to the US dollar induces the largest variation in the partner countries’ price indexes.

16

ARG ARGARGARGARG ARGARG ARGARGARG ARGARGARGARG ARGARG ARG ARGARG ARG ARGARGARGARGARG ARG ARGARG ARGARGARGARGARG ARGARGARGARG ARG ARGARGARGARGARGARG ARGARG ARGARG ARG ARGARGARGARG ARGARG ARG ARGARG ARGARGARG ARG ARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARGARGARG ARGARGARGARGARGARGARGARG ARGARG ARG ARGARG ARG ARGARGARGARG ARGARGARG ARGARGAUS AUSAUS AUSAUS AUS AUS AUSAUSAUS AUSAUSAUSAUS AUSAUSAUSAUS AUS AUSAUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUSAUS AUSAUS AUS AUSAUSAUSAUS AUS AUSAUS AUSAUS AUSAUSAUS AUS AUS AUS AUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUSAUSAUS AUSAUSAUS AUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUS AUTAUT AUTAUTAUTAUTAUT AUTAUT AUT AUT AUTAUTAUTAUT AUT AUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUT AUTAUTAUT AUT AUT AUTAUTAUT AUTAUT AUT AUT AUTAUTAUTAUTAUT AUT AUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUT AUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUTBEL BELBELBEL BELBEL BELBELBELBEL BEL BEL BELBEL BEL BELBEL BELBELBELBELBEL BEL BELBELBELBEL BELBEL BELBELBEL BELBEL BELBELBELBEL BEL BELBEL BELBELBELBELBELBEL BELBELBEL BELBELBEL BEL BELBELBELBELBEL BELBELBEL BELBEL BELBELBEL BELBELBEL BELBELBEL BELBEL BELBEL BELBELBEL BELBELBELBELBEL BELBEL BELBELBEL BEL BELBEL BELBEL BELBEL BELBEL BELBRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRA BRABRABRABRABRA BRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRA BRABRABRA BRABRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRA BRA

CANCANCANCAN CAN CANCAN CANCAN CAN CANCAN CAN CANCAN CANCANCAN CANCAN CANCANCANCAN CANCAN CANCANCAN CANCANCAN CAN CAN CANCANCANCAN CANCANCANCANCAN CANCAN CAN CANCAN CANCAN CANCAN CANCANCANCANCAN CANCAN CAN CANCAN CANCANCAN CANCAN CANCAN CAN CANCANCAN CANCAN CANCANCAN CANCAN CAN CANCAN CANCAN CANCANCANCAN CAN CANCANCAN CANCANCANCAN CANCAN CANCHE CHECHECHECHECHECHE CHECHECHE CHECHE CHECHE CHECHECHE CHE CHECHECHECHECHECHE CHECHECHE CHE CHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHECHE CHECHE CHECHE CHECHECHECHE CHECHECHECHE CHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHE CHECHECHE CHE CHECHECHECHECHE CHECHE CHE CHECHECHE CHECHECHECHE CHECHECHECHE CHE CHECHE CHECHECHE CHECHL CHLCHL CHL CHL CHLCHL CHLCHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHLCHLCHL CHLCHL CHL CHLCHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHL CHL CHLCHL CHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHLCHLCHL CHLCHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHL CHLCHLCHLCHLCHLCHL CHLCHLCHLCHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHLCHL

CHNCHNCHN CHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHN CHN CHNCHNCHNCHNCHN

CHNCHN CHNCHN

CHNCHN CHNCHNCHN CHN

CHNCHNCHN CHNCHN CHNCHNCHN CHNCHNCHNCHNCHNCHN

CHNCHN

CHNCHN

CHNCHNCHN

CHNCHN CHNCHNCHNCHN

CHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHNCHNCHN

CHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHNCHN CHNCHNCHNCHN CHNCHNCHNCHNCHNCHNCHN

CHN CHN CHN

COL COLCOLCOL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOLCOL COLCOLCOL COLCOLCOLCOL COLCOLCOL COL COLCOLCOL COL COLCOLCOLCOLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COL COLCOLCOLCOL COLCOL COLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOLCOL COL COLCOLCOLCOLCOLCOLCOL COLCOLCOLCOL COL COL COLCOL COLCOLCOL COLCOLCOL COL

DEUDEUDEUDEUDEU

DEUDEUDEUDEU DEUDEUDEU

DEUDEU

DEU

DEUDEUDEUDEU

DEU

DEUDEUDEU DEU

DEUDEUDEU

DEUDEU

DEUDEUDEUDEU

DEUDEU DEU DEUDEU

DEU

DEUDEU

DEU

DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU DEUDEUDEU DEUDEUDEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU DEU

DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DNK DNKDNKDNKDNK DNKDNKDNK DNKDNK DNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNK DNKDNKDNKDNKDNKDNKDNKDNKDNKDNK DNKDNKDNKDNK DNKDNKDNKDNK DNKDNKDNKDNK DNKDNK DNKDNK DNKDNKDNK DNK DNKDZA DZADZA DZADZADZADZA DZA DZADZADZADZA DZADZA DZADZA DZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZA DZADZADZADZA DZADZADZA DZADZADZADZA DZADZADZADZADZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZADZA DZA DZADZA DZADZA DZA DZADZADZA DZADZA DZADZA DZADZADZA DZADZA DZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZADZAEGY EGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGY EGYEGY EGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGY EGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGY EGY EGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGYEGYEGYESPESP ESPESP ESPESPESP ESPESP ESPESPESP ESPESP ESP ESPESPESPESP ESP ESPESP ESPESP ESP ESPESP ESPESPESPESP ESPESPESPESPESP ESP ESPESP ESPESPESP ESPESPESP ESPESP ESP ESPESP ESPESPESP ESPESP ESPESP ESPESP ESPESPESPESPESPESPESP ESPESP ESPESP ESPESPESP ESPESP ESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESP ESP ESPESP ESPESP ESP ESPESPESP ESP

FINFIN FIN FINFIN FINFINFIN FINFINFINFIN FIN FINFINFIN FINFIN FINFIN FINFIN FIN FINFINFINFIN FIN FIN FINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFINFIN FINFINFIN FINFIN FINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FIN FINFINFIN FINFINFINFINFINFINFIN FINFIN FINFIN FINFINFINFINFIN FIN

FRAFRAFRA

FRAFRA

FRAFRAFRAFRAFRA FRA FRAFRA FRAFRAFRA FRAFRAFRAFRA FRA

FRAFRA

FRAFRAFRA FRAFRA FRAFRAFRAFRAFRAFRA

FRAFRAFRA FRA FRAFRAFRA

FRAFRAFRAFRA FRAFRA

FRAFRA FRAFRAFRAFRA FRAFRAFRAFRA

FRA FRAFRA FRAFRAFRAFRAFRAFRAFRA

FRAFRA

FRAFRAFRAFRAFRAFRA

FRA

FRAFRAFRAFRA FRA

FRAFRAFRA

FRAFRAFRAFRAFRAFRAFRAFRAFRA

FRA FRAFRAFRAFRA

FRAFRA

GBRGBRGBR GBRGBRGBRGBRGBRGBRGBRGBRGBR GBRGBR GBRGBR GBRGBRGBRGBRGBRGBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBR

GBRGBRGBR GBRGBR GBRGBRGBRGBR GBR GBR

GBRGBRGBR GBR GBRGBR

GBRGBR

GBR GBR GBR GBR GBRGBRGBRGBRGBRGBRGBR GBRGBRGBR GBR

GBRGBR GBRGBRGBR

GBRGBR GBRGBRGBRGBR

GBRGBR

GBRGBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBR GBR GBRGBR GBR

GBR GBR

GRCGRC GRC GRCGRC GRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRC GRCGRCGRC GRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRC GRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRCGRCGRCGRC GRCGRCINDIND INDINDINDIND INDIND INDIND INDIND INDIND INDINDIND INDIND IND INDINDIND INDIND IND INDINDIND INDINDINDIND INDIND INDINDINDINDIND IND INDINDINDIND INDINDINDIND INDINDIND INDIND IND INDINDINDIND IND INDIND INDIND INDIND INDIND IND INDINDINDIND IND INDINDIND IND INDINDINDINDIND INDINDINDIND IND INDINDIND INDIND INDIND INDIND INDINDIND IRLIRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRLIRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRLIRLIRL IRLIRLIRLIRL IRL IRLIRL IRLIRLIRLIRLIRL IRLIRLIRL IRLIRLIRL IRL IRLIRL IRLIRLIRLIRL IRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRLIRLISR ISRISR ISR ISRISR ISRISRISRISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISR ISRISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISR ISRISR ISRISRISRISR ISR ISRISRISRISR ISR ISRISR ISRISR ISRISRISR ISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISRISRISRISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISRISR ISR ISRISRISRISRISRISR ISR

ITAITA ITA ITAITAITA

ITAITAITAITAITAITA ITAITA

ITA ITA ITAITA ITAITA

ITAITA ITAITAITA

ITAITA

ITAITA ITAITAITA

ITAITA ITAITAITA ITAITAITAITA ITA

ITAITAITA ITAITA ITAITA ITAITA ITAITA ITAITA ITA

ITAITAITA

ITA ITAITAITAITA ITAITAITAITAITAITA ITA

ITA ITAITA ITA ITAITAITAITA ITAITAITA

ITAITAITA ITAITA ITAITA

ITA ITA ITAITAITA ITAITAITAITAITAITA

JPNJPNJPNJPNJPNJPN

JPN

JPN

JPNJPN

JPNJPN

JPNJPNJPN

JPNJPN

JPNJPN

JPN JPNJPNJPNJPN

JPNJPNJPN

JPNJPNJPN

JPNJPNJPN

JPN JPNJPNJPNJPN JPNJPN JPN

JPNJPN

JPN

JPN

JPNJPN

JPNJPN JPN JPN JPNJPN

JPNJPNJPNJPN

JPNJPNJPN

JPNJPNJPN

JPNJPN

JPN JPNJPN

JPNJPNJPN JPNJPN

JPNJPN

JPNJPNJPN

JPNJPN

JPNJPNJPN

JPNJPNJPNJPN

JPNJPNJPNJPNJPN

JPNJPN

JPNJPN

JPNJPN

JPNJPN

KORKORKORKORKORKOR KORKORKORKORKOR KOR KOR KOR

KOR KORKOR KORKOR KORKOR KORKORKORKOR KORKOR KORKORKOR KORKOR KORKOR KORKORKORKORKORKORKORKOR KOR

KOR KOR KORKOR KORKORKOR KOR KORKORKORKOR

KORKOR KORKORKOR KORKOR KOR KORKORKOR KORKOR KORKORKOR KORKOR

KORKORKOR KORKORKORKOR KORKORKORKOR KORKORKORKORKOR KORKOR KOR KORKOR KORKORKOR

KORKORKOR

MEXMEXMEX MEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEX MEXMEXMEX MEX MEXMEXMEX MEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEXMEXMEX MEX MEXMEXMEXMEXMEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEXMEX MEXMEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEX MEXMEXMEX MEXMEX MEXMEX MEXMEXMYSMYS MYSMYSMYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYSMYS MYSMYSMYSMYS MYS MYSMYSMYS MYS MYSMYS MYSMYS MYSMYSMYSMYS MYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYSMYS MYS MYSMYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSNOR NOR NORNORNORNORNOR NORNOR NORNORNOR NOR NORNORNOR NORNORNORNORNOR NORNOR NORNOR NORNORNOR NOR NORNOR NORNOR NORNORNOR NORNOR NORNORNOR NORNORNORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NORNOR NORNORNOR NORNOR NORNOR NORNOR NOR NOR NORNORNORNOR NORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NOR NORNOR NORNZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZL NZLNZLNZL NZLNZL NZLNZL NZL NZLNZLNZLNZL NZLNZL NZLNZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZLNZL NZL NZLNZL NZL NZLNZLNZL NZLNZLNZL NZLNZLNZL NZLNZLPAK PAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAK PAK PAKPAK PAK PAKPAK PAK PAKPAKPAKPAK PAK PAK PAKPAKPAK PAKPAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAKPAKPAK PAKPAKPAKPAKPAK PAKPAK PAKPAK PAKPERPER PERPER PER PERPER PER PERPERPER PERPER PERPERPER PERPERPERPER PERPER PERPER PERPER PERPER PERPERPER PERPER PERPER PER PERPERPERPERPER PERPER PERPERPER PERPER PERPERPER PERPERPER PERPERPERPERPERPER PER PER PERPER PERPER PERPER PERPER PER PERPER PERPER PERPER PER PERPERPER PERPER PERPERPER PERPER PERPER PERPERPER PERPERPERPER PERPERPER PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHL PHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPHL PHL PHL PHLPHLPHLPHL PHL PHLPHL PHLPHL PHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPRTPRT PRTPRT PRT PRTPRTPRTPRTPRTPRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT PRTPRT PRTPRTPRTPRT PRT PRTPRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRTPRT PRTPRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRT RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUS RUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUSRUS RUS RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUSRUSRUSRUSRUS RUSRUS RUS RUSRUSRUSRUSRUSRUS RUSRUSRUS SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWE SWE SWESWE SWESWE SWESWESWE SWESWE SWE SWE SWESWESWE SWESWESWESWE SWE SWESWESWESWESWE SWE SWESWE SWESWE SWESWE SWE SWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWESWESWE SWE SWESWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWESWE SWETURTURTUR TUR TURTURTURTURTURTUR TURTURTUR TURTUR TURTUR TURTURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTURTUR TURTUR TURTUR TURTUR TURTURTURTUR TURTUR TURTURTURTURTUR TURTURTURTUR TURTURTUR TURTURTUR TURTUR TUR TUR TURTUR TURTURTURTUR TUR TUR TURTUR TURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTUR TURTUR TURTURTUR TURTURTURTUR

USA USAUSA

USAUSA

USAUSA

USAUSAUSA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSA

USAUSA

USAUSA

USA USAUSA USAUSA

USA USAUSAUSAUSA

USA USA USAUSAUSAUSA USAUSAUSA

USAUSA USAUSA

USAUSAUSAUSAUSAUSA USA USA

USAUSAUSAUSA

USAUSAUSA

USAUSA USA

USA USAUSA

USA

USAUSAUSAUSAUSA

USAUSA

USAUSAUSAUSAUSAUSAUSAUSA USA

USAUSAUSAUSA USAUSAUSAUSAUSA

USAUSAUSA

USAUSAUSA

VENVENVENVENVEN VEN VENVEN VEN VENVENVEN VEN VENVEN VEN VENVEN VENVENVENVEN VENVENVEN VENVEN VENVENVEN VENVENVEN VENVENVENVENVENVENVEN VENVEN VENVENVENVENVEN VEN VENVENVEN VENVEN VEN VENVENVEN VEN VENVEN VENVEN VENVEN VENVEN VENVEN VEN VENVEN VENVENVEN VENVENVEN VENVEN VENVEN VENVEN VEN VENVENVENVENVENVEN VENVENVEN VENVENVEN VENVEN VENVENZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAFZAFZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAFZAFZAF ZAF ZAFZAF ZAFZAFZAFZAFZAFZAF ZAF ZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAF-4-3

.5-3

-2.5

Estim

ated

exc

hang

e ra

te e

last

icity

-.4 -.2 0 .2 .4Exchange rate shock

Specification 2: Gold medal mistakeExchange rate shock vs. magnitude of exchange rate bias

(a) Gold medal mistake

ARG ARGARGARGARG ARGARG ARGARGARG ARGARGARG

ARGARGARG ARG ARGARG ARG ARGARGARGARGARG ARG ARG

ARGARGARGARGARGARG ARGARGARGARG ARG ARGARGARGARGARGARG ARGARG ARG

ARG ARG ARGARGARGARG ARGARG ARG ARGARG ARGARGARG ARG ARG ARGARG ARGARGARGARG ARG ARGARGARG

ARGARGARGARG ARGARGARGARGARGARGARGARG ARGARG ARG ARGARG ARG ARGARGARGARG ARGARGARG ARGARGAUS AUSAUS AUSAUS AUS AUS AUSAUSAUS AUSAUSAUSAUS AUSAUSAUSAUS AUS AUSAUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUSAUS AUSAUS AUS AUSAUSAUSAUS AUS AUSAUS AUSAUS AUSAUSAUS AUS AUS AUS AUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUSAUSAUSAUSAUSAUS AUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUSAUT

AUTAUTAUTAUTAUT

AUTAUT

AUT AUT AUT AUTAUTAUTAUT AUT AUTAUT AUT AUTAUTAUTAUTAUT AUT

AUT AUTAUT AUTAUTAUT AUT AUT AUTAUT

AUT AUTAUT AUT AUT AUTAUTAUTAUTAUT AUT AUTAUT AUTAUT

AUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUTAUTAUTAUTAUT AUT

AUTAUT AUTAUT

AUT AUTAUTAUTAUT AUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUT BEL BELBELBEL BELBEL

BELBELBELBEL BEL

BEL BELBEL

BEL BELBEL BELBELBEL

BELBELBEL

BELBELBELBEL BEL

BELBELBELBEL BEL

BELBEL

BELBELBELBEL BEL

BEL BELBELBELBELBELBELBEL

BELBEL

BELBEL

BELBEL BELBELBELBELBEL

BELBELBEL

BELBEL

BELBELBEL BELBELBEL BELBELBEL BEL

BELBELBEL BELBELBEL

BELBELBELBELBEL

BELBEL

BELBELBEL

BEL BEL

BEL

BELBEL

BELBEL

BELBEL

BELBRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA

BRABRA BRABRABRA BRABRA

BRABRA BRABRABRABRABRABRABRA

BRABRA BRA BRABRA BRABRABRA BRABRABRABRABRABRABRABRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA

BRABRA BRA

BRABRABRA BRABRA BRA

BRABRABRA

BRA BRABRABRABRA

BRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRABRABRABRA

BRABRA

BRA BRACANCANCANCANCAN

CAN

CANCAN

CANCAN

CAN

CANCAN CAN

CAN

CAN

CANCANCANCAN

CANCANCAN

CAN CANCAN

CANCAN

CAN

CAN

CANCANCAN

CANCAN

CANCANCAN

CANCANCANCANCAN

CANCAN

CAN

CAN

CANCAN

CAN

CANCAN

CANCANCAN

CANCAN

CANCAN CAN

CAN

CAN

CANCANCAN

CANCAN

CAN

CANCAN

CANCANCAN CAN

CANCANCAN

CANCAN

CANCAN

CAN

CAN

CANCAN

CANCANCANCAN

CAN CAN

CANCAN

CANCAN

CANCANCAN

CAN

CANCHE CHECHECHECHECHECHE

CHECHECHE

CHECHE

CHECHE

CHECHECHE CHE CHECHECHECHECHECHECHE

CHECHE CHECHE

CHECHE

CHECHE CHECHECHECHE

CHECHECHECHECHE

CHECHE CHECHE CHECHE

CHECHECHECHE CHECHECHECHECHECHE CHECHE CHE

CHECHECHECHE

CHE CHECHECHE

CHECHECHECHE CHE CHECHECHECHE

CHE CHECHE CHE CHECHECHE CHECHECHECHE CHECHECHECHE CHE CHECHE

CHECHECHE

CHECHL CHLCHL CHL CHL CHLCHL CHLCHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHLCHLCHL CHLCHL CHL CHLCHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHL CHL CHLCHL CHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHLCHLCHL CHLCHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHL CHLCHLCHLCHLCHLCHL CHLCHLCHLCHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHLCHL

CHNCHNCHN

CHN

CHNCHN CHN

CHNCHNCHNCHN

CHN

CHNCHN

CHNCHN

CHNCHNCHN

CHN

CHN

CHNCHN

CHN

CHNCHNCHN

CHN

CHNCHN

CHNCHNCHN

CHNCHNCHNCHN

CHNCHNCHNCHNCHNCHN

CHN

CHN

CHN

CHN

CHN

CHN

CHNCHN

CHN

CHNCHNCHNCHNCHN

CHNCHN

CHNCHNCHNCHN

CHNCHNCHN

CHN

CHNCHNCHN

CHNCHNCHN

CHN

CHNCHN

CHNCHNCHN

CHNCHN CHN

CHNCHN

CHNCHNCHNCHNCHN

CHNCHNCHN

CHNCHN

CHNCHNCHN

CHN

CHNCHNCOL COLCOLCOL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOLCOL COLCOLCOL COLCOLCOLCOL COLCOLCOL COL COLCOLCOL COL COLCOLCOLCOLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COL COLCOLCOLCOL COLCOL COLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOLCOL COL COLCOLCOLCOLCOLCOLCOL COLCOLCOLCOL COL COL COLCOL COLCOLCOL COLCOLCOL COL DEU

DEUDEUDEU

DEU

DEUDEU

DEUDEU

DEUDEU

DEU

DEUDEU

DEU

DEUDEUDEUDEU

DEU

DEUDEUDEU

DEU

DEU

DEUDEU

DEU

DEUDEU

DEUDEUDEU

DEU

DEUDEU

DEU

DEU

DEU

DEU

DEU

DEU

DEU

DEU

DEUDEU

DEU

DEU

DEU

DEU

DEUDEU

DEUDEUDEUDEU

DEU

DEUDEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DEUDEUDEU

DEU

DEU

DEUDEU

DEU

DEU

DEU

DEU

DEU

DEU

DEU

DEUDEUDEU

DEUDEU

DEU

DEUDEU

DEU

DEU

DEU

DEUDEU

DEU

DEU

DEU

DEU

DEU

DNKDNKDNKDNKDNK DNKDNKDNK

DNKDNK DNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNK DNKDNKDNKDNKDNKDNKDNKDNKDNKDNK DNKDNKDNKDNK

DNKDNKDNKDNK DNKDNKDNKDNK DNKDNK DNKDNK DNKDNKDNK DNK DNKDZA DZADZA DZADZADZADZA DZA DZADZADZADZA DZADZA DZADZA DZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZA DZADZADZADZA DZADZADZA DZADZADZADZA DZADZADZADZADZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZADZA DZA DZADZA DZADZA DZA DZADZADZA DZADZA DZADZA DZADZADZA DZADZA DZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZADZAEGY EGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGY EGYEGY EGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGY EGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGY EGY EGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGYEGYEGY ESPESP ESP

ESPESPESPESP

ESPESP ESPESP

ESP ESPESP ESP ESPESPESPESP

ESP ESPESP ESPESP ESP ESPESP

ESPESPESPESPESPESPESPESPESP ESP ESPESP

ESPESPESP ESPESPESP

ESPESP ESP ESPESP ESPESPESP ESPESP

ESPESP ESPESP

ESPESPESPESPESPESPESP ESPESP ESPESPESPESP

ESPESPESP ESP

ESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESP ESP ESPESP ESPESP ESP ESPESPESP ESPFINFIN FIN FINFIN FINFINFIN FINFINFINFIN FIN FINFINFIN FINFIN FINFIN FINFIN FIN FINFINFINFIN FIN FIN FINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFINFIN FINFINFIN FINFIN FINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FIN FINFINFIN FINFINFINFINFINFINFIN FINFIN FINFIN FINFINFINFINFIN FIN

FRAFRA

FRA

FRA

FRA

FRAFRAFRA

FRA

FRAFRA

FRAFRAFRAFRAFRA

FRA

FRAFRAFRAFRA

FRA

FRA

FRAFRAFRA

FRAFRA

FRA

FRAFRA

FRAFRAFRA

FRAFRA

FRA

FRAFRA

FRAFRA

FRA

FRAFRAFRA

FRAFRA

FRAFRA

FRAFRAFRA

FRAFRAFRA

FRA

FRA

FRAFRAFRA

FRAFRA

FRAFRAFRA

FRAFRA

FRA

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRA

FRAFRAFRAFRA

FRAFRA

FRA

FRAFRAFRAFRAFRAFRAFRA

FRAFRA

FRAFRA

FRAFRA

FRA

FRAFRAGBRGBR

GBRGBRGBRGBR

GBR

GBRGBRGBRGBRGBR

GBRGBR GBRGBR GBR

GBR

GBRGBRGBRGBRGBR

GBRGBRGBRGBRGBRGBR

GBR GBRGBR

GBR

GBRGBR

GBRGBRGBRGBR

GBRGBRGBR GBR

GBR

GBRGBR GBR

GBRGBR

GBR

GBR

GBRGBR

GBRGBR GBRGBR

GBRGBR

GBRGBRGBRGBRGBRGBR

GBR

GBRGBRGBR

GBRGBR

GBR

GBR

GBRGBRGBR

GBR

GBR

GBR

GBRGBRGBRGBR

GBRGBRGBR

GBRGBR

GBRGBR

GBRGBRGBR

GBRGBR

GBRGBR

GBRGBR

GBRGRCGRC GRC GRCGRC GRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRC GRCGRCGRC GRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRC GRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRCGRCGRCGRC GRCGRCINDIND INDINDINDIND

INDIND INDIND INDIND INDINDINDINDIND INDIND IND INDINDIND

INDIND

IND INDINDIND INDINDINDINDIND

IND INDINDINDINDINDIND INDINDINDIND INDINDINDIND

INDINDIND

INDIND IND INDINDINDIND IND INDIND

INDIND

INDIND

INDIND IND INDINDIND

INDIND INDINDIND IND INDINDINDINDIND INDINDINDIND IND INDIND

INDINDIND INDIND INDIND INDIND

INDIRLIRLIRLIRL

IRLIRLIRL IRL

IRLIRL IRL

IRLIRL

IRLIRLIRLIRLIRL

IRLIRLIRLIRLIRL

IRL IRLIRLIRL IRLIRL IRLIRLIRLIRL IRLIRLIRL IRL

IRLIRLIRLIRLIRLIRL

IRL IRL IRLIRLIRL IRLIRLIRLIRL

IRLIRL

IRL IRLIRLIRL

IRLIRLIRL IRLIRLIRL

IRL IRLIRLIRL

IRLIRLIRLIRLIRL IRLIRLIRLIRLIRL

IRLIRL IRL

IRL IRLIRLIRLIRLIRL IRL

IRL

IRL IRLIRL IRL

IRLIRLIRL

IRL IRLIRLIRL ISR ISRISR ISR ISRISR ISRISRISRISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISR ISRISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISR ISRISR ISRISRISRISR ISR ISRISRISRISR ISR ISRISR ISRISR ISRISRISR ISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISRISRISRISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISRISR ISR ISRISRISRISRISRISR ISRITA

ITA ITAITAITAITA

ITA

ITAITAITAITAITA

ITAITA

ITAITA

ITAITA

ITAITA

ITAITA

ITAITAITA

ITA

ITA

ITA

ITAITAITAITA

ITA

ITAITAITAITA ITAITAITAITA

ITA

ITA

ITAITA

ITAITA

ITAITA

ITAITA

ITAITAITA

ITAITA

ITAITA

ITA

ITAITAITAITAITA ITAITA

ITAITA

ITAITAITA

ITAITAITA

ITA ITAITA

ITAITA

ITAITAITA

ITAITA

ITA ITAITAITAITA

ITAITA ITAITAITA

ITAITAITAITAITAITA

JPNJPNJPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPNJPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPNJPN

JPNJPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPNJPN

JPNJPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPNJPN

JPNJPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNKOR

KORKOR

KORKORKOR

KOR

KORKORKOR

KORKOR

KORKOR

KOR

KORKOR

KORKOR

KORKORKOR

KORKOR

KOR

KOR

KOR

KORKOR

KORKORKOR

KOR

KOR

KORKORKORKOR

KOR

KORKORKOR

KOR

KORKOR

KORKOR

KOR

KORKOR

KORKORKORKOR

KOR

KOR

KOR

KOR

KORKOR

KOR

KOR

KORKORKOR

KORKOR

KOR

KORKORKOR

KOR

KOR

KORKOR

KOR

KORKORKOR

KORKOR

KORKORKOR

KORKORKORKOR

KORKORKOR

KORKOR

KORKOR

KOR

KOR

KOR

KOR

KORMEXMEXMEX

MEXMEX MEXMEX

MEXMEX

MEXMEXMEX

MEXMEX

MEXMEXMEX MEX

MEXMEX MEXMEX

MEX

MEX MEXMEXMEX MEX MEXMEX

MEXMEX

MEX

MEXMEX

MEXMEX

MEXMEXMEXMEXMEX MEXMEXMEXMEXMEXMEXMEX

MEXMEXMEXMEX

MEXMEX

MEX MEXMEXMEXMEX MEX

MEXMEXMEXMEXMEX

MEXMEX

MEXMEX

MEXMEXMEX

MEXMEX

MEXMEXMEX

MEXMEXMEXMEX

MEXMEXMEX MEX

MEXMEX

MEXMEXMEX

MEXMEXMEX MEXMEX

MEXMEX

MEXMEXMYSMYS MYSMYSMYS

MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYS MYSMYS

MYSMYSMYSMYS

MYSMYS

MYSMYSMYSMYSMYS

MYSMYSMYSMYSMYS MYSMYS

MYSMYS MYSMYS MYSMYS MYSMYSMYSMYS MYSMYS

MYSMYSMYSMYS MYSMYSMYSMYSMYSMYS

MYSMYSMYSMYS MYSMYS

MYS MYSMYSMYSMYS

MYS MYSMYSMYS

MYSMYS MYSMYSMYS MYSMYS

MYS MYSMYSMYS

MYSMYS MYSMYS

MYSMYSMYS

MYSMYSMYSMYS

MYSMYSMYSMYSNOR NOR NORNORNORNORNOR NORNOR NORNORNOR NOR NORNORNOR NORNORNORNORNOR NORNOR NORNOR NORNORNOR NOR NORNOR NORNOR NORNORNOR NORNOR NORNORNOR NORNORNORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NORNOR NORNORNOR NORNOR NORNOR NORNOR NOR NOR NORNORNORNOR NORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NOR NORNOR NORNZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZL NZLNZLNZL NZLNZL NZLNZL NZL NZLNZLNZLNZL NZLNZL NZLNZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZLNZL NZL NZLNZL NZL NZLNZLNZL NZLNZLNZL NZLNZLNZL NZLNZLPAK PAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAKPAKPAK PAK

PAKPAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAK PAK PAKPAK PAK PAKPAK PAK PAKPAKPAK

PAK PAK PAK PAKPAKPAK PAKPAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAKPAKPAK PAKPAKPAKPAKPAKPAKPAK PAKPAK PAKPERPER PERPER PER PERPER PER PERPERPER PERPER PERPERPER PERPERPERPER PERPER PERPER PERPER PERPER PERPERPER PERPER PERPER PER PERPERPERPERPER PERPER PERPERPER PERPER PERPERPER PERPERPER PERPERPERPERPERPER PER PER PERPER PERPER PERPER PERPER PER PERPER PERPER PERPER PER PERPERPER PERPER PERPERPER PERPER PERPER PERPERPER PERPERPERPER PERPERPER PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHL PHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL

PHLPHL PHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHLPHLPHL PHLPHLPHLPHLPHLPHL PHLPHL PHL PHL PHLPHLPHLPHL PHL PHLPHL PHLPHL PHL PHL

PHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPRTPRT PRTPRT PRT PRTPRTPRTPRTPRTPRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT PRTPRT PRTPRTPRTPRT PRT PRTPRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRTPRT PRTPRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRT RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUS RUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUSRUS RUS RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUSRUSRUSRUSRUS RUSRUS RUS RUSRUSRUSRUSRUSRUS RUSRUSRUS SWESWESWESWESWESWESWE

SWESWESWE

SWESWE SWESWESWESWE

SWESWE SWESWESWE SWE SWESWE SWESWE SWESWE

SWESWESWE SWE SWE SWESWESWE SWESWESWE

SWESWE SWESWESWESWESWE SWE SWESWE SWESWE

SWESWE SWE SWESWE SWESWE SWE

SWESWESWESWE

SWESWESWE SWESWESWE

SWE SWESWESWESWE SWESWESWE

SWESWE SWESWESWESWESWE

SWESWE SWESWESWE

SWESWESWE SWESWESWE

SWESWESWESWESWETURTURTUR TUR TURTURTURTURTURTUR TURTURTUR TURTUR TURTUR TURTURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTURTUR TURTUR TURTUR TURTUR TURTURTURTUR TURTUR TURTURTURTURTUR TURTURTURTUR TURTURTUR TURTURTUR TURTUR TUR TUR TURTUR TURTURTURTUR TUR TUR TURTUR TURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTUR TURTUR TURTURTUR TURTURTURTUR

USAUSA

USA

USAUSA

USA

USA

USAUSA

USA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSA

USAUSAUSA

USAUSA

USAUSA

USAUSA

USAUSAUSA

USAUSA

USAUSA

USAUSAUSAUSA

USAUSAUSA

USAUSA

USAUSAUSA

USAUSAUSAUSAUSAUSA USA

USAUSAUSA

USAUSA

USAUSA

USAUSA USA

USAUSA

USA

USA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSAUSAUSAUSA

USA

USAUSA

USAUSAUSAUSA

USAUSAUSAUSAUSA

USAUSAUSA

USAUSAUSA VENVENVENVENVEN VEN VENVEN VEN VENVENVEN VEN VENVEN VEN VENVEN VENVENVENVEN VENVENVEN VENVEN VENVENVEN VENVENVEN VENVENVENVENVENVENVEN VENVEN VENVENVENVENVEN VEN VENVENVEN VENVEN VEN VENVENVEN VEN VENVEN VENVEN VENVEN VENVEN VENVEN VEN VENVEN VENVENVEN VENVENVEN VENVEN VENVEN VENVEN VEN VENVENVENVENVENVEN VENVENVEN VENVENVEN VENVEN VENVENZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAFZAFZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAFZAFZAF ZAF ZAFZAF ZAFZAFZAFZAFZAFZAF ZAF ZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAF

-4.0

4-4

.02

-4-3

.98

-3.9

6-3

.94

Estim

ated

exc

hang

e ra

te e

last

icity

-.4 -.2 0 .2 .4Exchange rate shock

Specification 3: REER a la McGuirkExchange rate shock vs. magnitude of exchange rate bias

(b) McGuirk

ARG ARGARGARGARG ARGARG ARGARGARG ARGARGARGARG ARGARG ARG ARGARG ARG ARGARGARGARGARG ARG ARGARG ARGARGARGARGARG ARGARGARGARG ARG ARGARGARGARGARGARG ARGARG ARGARG ARG ARGARGARGARG ARGARG ARG ARGARG ARGARGARG ARG ARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARGARGARG ARGARGARGARGARGARGARGARG ARGARG ARG ARGARG ARG ARGARGARGARG ARGARGARG ARGARGAUS AUSAUS AUSAUS AUS AUS AUSAUSAUS AUSAUSAUSAUS AUSAUSAUSAUS AUS AUSAUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUSAUS AUSAUS AUS AUSAUSAUSAUS AUS AUSAUS AUSAUS AUSAUSAUS AUS AUS AUS AUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUSAUSAUS AUSAUSAUS AUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUS AUTAUT AUTAUTAUTAUTAUT AUTAUT AUT AUT AUTAUTAUTAUT AUT AUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUT AUTAUTAUT AUT AUT AUTAUTAUT AUTAUT AUT AUT AUTAUTAUTAUTAUT AUT AUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUT AUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUT BEL BELBELBEL BELBEL BELBELBELBEL BEL BEL BELBEL BEL BELBEL BELBELBELBELBEL BEL BELBELBELBEL BELBEL BELBELBEL BELBEL BELBELBELBEL BEL BELBEL BELBELBELBELBELBEL BELBELBEL BELBELBEL BEL BELBELBELBELBEL BELBELBEL BELBEL BELBELBEL BELBELBEL BELBELBEL BELBEL BELBEL BELBELBEL BELBELBELBELBEL BELBEL BELBELBEL BEL BELBEL BELBEL BELBEL BELBEL BELBRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRA BRABRABRABRABRA BRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRA BRABRABRA BRABRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRA BRACANCANCANCAN CAN CANCAN CANCAN CAN CANCAN CAN CANCAN CANCANCAN CANCAN CANCANCANCAN CANCAN CANCANCAN CANCANCAN CAN CAN CANCANCANCAN CANCANCANCANCAN CANCAN CAN CANCAN CANCAN CANCAN CANCANCANCANCAN CANCAN CAN CANCAN CANCANCAN CANCAN CANCAN CAN CANCANCAN CANCAN CANCANCAN CANCAN CAN CANCAN CANCAN CANCANCANCAN CAN CANCANCAN CANCANCANCAN CANCAN CANCHE CHECHECHECHECHECHE CHECHECHE CHECHE CHECHE CHECHECHE CHE CHECHECHECHECHECHE CHECHECHE CHE CHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHECHE CHECHE CHECHE CHECHECHECHE CHECHECHECHE CHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHE CHECHECHE CHE CHECHECHECHECHE CHECHE CHE CHECHECHE CHECHECHECHE CHECHECHECHE CHE CHECHE CHECHECHE CHECHL CHLCHL CHL CHL CHLCHL CHLCHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHLCHLCHL CHLCHL CHL CHLCHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHL CHL CHLCHL CHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHLCHLCHL CHLCHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHL CHLCHLCHLCHLCHLCHL CHLCHLCHLCHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHLCHLCHNCHNCHN CHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHN CHN CHNCHNCHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHN CHNCHNCHNCHN CHNCHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHNCHN CHN CHNCHNCHNCHNCHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHNCHN CHNCHNCHNCHN CHNCHNCHNCHN CHNCHNCHNCHN CHN CHNCOL COLCOLCOL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOLCOL COLCOLCOL COLCOLCOLCOL COLCOLCOL COL COLCOLCOL COL COLCOLCOLCOLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COL COLCOLCOLCOL COLCOL COLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOLCOL COL COLCOLCOLCOLCOLCOLCOL COLCOLCOLCOL COL COL COLCOL COLCOLCOL COLCOLCOL COL DEUDEUDEUDEUDEU

DEUDEUDEUDEU DEUDEUDEUDEUDEU

DEU

DEUDEUDEUDEU

DEU

DEUDEUDEU DEUDEU DEUDEU

DEUDEU DEU

DEUDEUDEUDEU

DEU DEU DEUDEU

DEU

DEU DEU

DEU

DEUDEU

DEUDEUDEU

DEUDEU DEUDEU DEUDEUDEU DEUDEUDEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEU

DEUDEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU DEU

DEUDEU

DEUDEUDEU

DEUDEU DEU

DEUDEU

DNK DNKDNKDNKDNK DNKDNKDNK DNKDNK DNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNK DNKDNKDNKDNKDNKDNKDNKDNKDNKDNK DNKDNKDNKDNK DNKDNKDNKDNK DNKDNKDNKDNK DNKDNK DNKDNK DNKDNKDNK DNK DNKDZA DZADZA DZADZADZADZA DZA DZADZADZADZA DZADZA DZADZA DZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZA DZADZADZADZA DZADZADZA DZADZADZADZA DZADZADZADZADZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZADZA DZA DZADZA DZADZA DZA DZADZADZA DZADZA DZADZA DZADZADZA DZADZA DZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZADZAEGY EGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGY EGYEGY EGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGY EGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGY EGY EGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGYEGYEGY ESPESP ESPESP ESPESPESP ESPESP ESPESPESP ESPESP ESP ESPESPESPESP ESP ESPESP ESPESP ESP ESPESP ESPESPESPESP ESPESPESPESPESP ESP ESPESP ESPESPESP ESPESPESP ESPESP ESP ESPESP ESPESPESP ESPESP ESPESP ESPESP ESPESPESPESPESPESPESP ESPESP ESPESP ESPESPESP ESPESP ESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESP ESP ESPESP ESPESP ESP ESPESPESP ESPFINFIN FIN FINFIN FINFINFIN FINFINFINFIN FIN FINFINFIN FINFIN FINFIN FINFIN FIN FINFINFINFIN FIN FIN FINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFINFIN FINFINFIN FINFIN FINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FIN FINFINFIN FINFINFINFINFINFINFIN FINFIN FINFIN FINFINFINFINFIN FINFRAFRAFRA FRAFRA FRAFRAFRAFRAFRA FRA FRAFRA FRAFRAFRA FRAFRAFRAFRA FRAFRA FRAFRAFRAFRA FRAFRA FRA FRAFRAFRAFRAFRA FRAFRAFRA FRA FRAFRAFRA FRAFRAFRAFRA FRAFRA FRAFRA FRAFRAFRAFRA FRAFRAFRA FRAFRA FRAFRA FRAFRA FRAFRAFRAFRAFRA FRAFRA FRAFRA FRAFRAFRAFRAFRA FRAFRAFRAFRA FRAFRAFRAFRA FRAFRAFRAFRAFRAFRAFRAFRAFRA FRA FRAFRAFRAFRA FRAFRAGBRGBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBR GBRGBR GBRGBR GBRGBRGBRGBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBR GBRGBR GBRGBR GBRGBRGBRGBR GBR GBRGBR GBRGBR GBR GBRGBRGBR GBRGBR GBR GBR GBR GBRGBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBR GBRGBRGBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBR GBR GBRGBR GBRGBR GBRGRCGRC GRC GRCGRC GRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRC GRCGRCGRC GRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRC GRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRCGRCGRCGRC GRCGRCINDIND INDINDINDIND INDIND INDIND INDIND INDIND INDINDIND INDIND IND INDINDIND INDIND IND INDINDIND INDINDINDIND INDIND INDINDINDINDIND IND INDINDINDIND INDINDINDIND INDINDIND INDIND IND INDINDINDIND IND INDIND INDIND INDIND INDIND IND INDINDINDIND IND INDINDIND IND INDINDINDINDIND INDINDINDIND IND INDINDIND INDIND INDIND INDIND INDINDIND IRLIRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRLIRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRLIRLIRL IRLIRLIRLIRL IRL IRLIRL IRLIRLIRLIRLIRL IRLIRLIRL IRLIRLIRL IRL IRLIRL IRLIRLIRLIRL IRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRLIRL ISR ISRISR ISR ISRISR ISRISRISRISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISR ISRISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISR ISRISR ISRISRISRISR ISR ISRISRISRISR ISR ISRISR ISRISR ISRISRISR ISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISRISRISRISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISRISR ISR ISRISRISRISRISRISR ISR ITAITA ITA ITAITAITAITA ITAITAITAITAITA ITAITAITA ITA ITAITA ITAITA ITAITA ITAITAITA ITAITAITA ITA ITAITAITAITA ITA ITAITAITA ITAITAITAITA ITAITA ITAITA ITAITA ITAITA ITAITA ITAITA ITAITA ITAITAITA ITAITA ITAITAITAITA ITAITAITAITA ITAITA ITAITA ITAITA ITA ITAITA ITAITA ITAITAITA ITAITAITA ITAITA ITAITAITA ITA ITAITAITA ITAITAITAITAITAITA

JPN

JPNJPNJPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPNJPN

JPNJPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPNJPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPNJPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPN

JPNKOR

KORKORKORKORKORKOR

KORKORKORKOR KOR KOR KORKOR

KORKOR KORKOR KORKOR KORKORKORKORKOR

KOR KORKORKOR KORKOR KORKOR KORKORKORKOR

KOR

KORKORKOR KORKOR KOR KORKOR KORKORKOR KOR KORKORKOR

KOR

KORKOR

KORKORKOR KORKOR

KOR KORKORKOR KORKOR KORKORKOR KORKOR

KORKORKOR KORKORKORKOR KORKORKORKOR KORKORKORKORKOR KORKOR KOR KORKOR KORKORKOR

KORKORKORMEXMEXMEX MEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEX MEXMEXMEX MEX MEXMEXMEX MEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEXMEXMEX MEX MEXMEXMEXMEXMEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEXMEX MEXMEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEX MEXMEXMEX MEXMEX MEXMEX MEXMEXMYSMYS MYSMYSMYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYS MYSMYS MYSMYSMYS MYS

MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYS MYS MYSMYSMYS MYS MYSMYS MYSMYS MYSMYSMYSMYS MYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYS

MYS MYS MYSMYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYS MYSMYSMYS MYSMYS MYSMYS

MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSNOR NOR NORNORNORNORNOR NORNOR NORNORNOR NOR NORNORNOR NORNORNORNORNOR NORNOR NORNOR NORNORNOR NOR NORNOR NORNOR NORNORNOR NORNOR NORNORNOR NORNORNORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NORNOR NORNORNOR NORNOR NORNOR NORNOR NOR NOR NORNORNORNOR NORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NOR NORNOR NORNZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZL NZLNZLNZL NZLNZL NZLNZL NZL NZLNZLNZLNZL NZLNZL NZLNZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZLNZL NZL NZLNZL NZL NZLNZLNZL NZLNZLNZL NZLNZLNZL NZLNZLPAK PAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAK PAK PAKPAK PAK PAKPAK PAK PAKPAKPAKPAK PAK PAK PAKPAKPAK PAKPAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAKPAKPAK PAKPAKPAKPAKPAK PAKPAK PAKPAK PAKPERPER PERPER PER PERPER PER PERPERPER PERPER PERPERPER PERPERPERPER PERPER PERPER PERPER PERPER PERPERPER PERPER PERPER PER PERPERPERPERPER PERPER PERPERPER PERPER PERPERPER PERPERPER PERPERPERPERPERPER PER PER PERPER PERPER PERPER PERPER PER PERPER PERPER PERPER PER PERPERPER PERPER PERPERPER PERPER PERPER PERPERPER PERPERPERPER PERPERPER PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHL PHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPHL PHL PHL PHLPHLPHLPHL PHL PHLPHL PHLPHL PHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPRTPRT PRTPRT PRT PRTPRTPRTPRTPRTPRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT PRTPRT PRTPRTPRTPRT PRT PRTPRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRTPRT PRTPRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRT RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUS RUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUSRUS RUS RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUSRUSRUSRUSRUS RUSRUS RUS RUSRUSRUSRUSRUSRUS RUSRUSRUS SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWE SWE SWESWE SWESWE SWESWESWE SWESWE SWE SWE SWESWESWE SWESWESWESWE SWE SWESWESWESWESWE SWE SWESWE SWESWE SWESWE SWE SWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWESWESWE SWE SWESWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWESWE SWETURTURTUR TUR TURTURTURTURTURTUR TURTURTUR TURTUR TURTUR TURTURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTURTUR TURTUR TURTUR TURTUR TURTURTURTUR TURTUR TURTURTURTURTUR TURTURTURTUR TURTURTUR TURTURTUR TURTUR TUR TUR TURTUR TURTURTURTUR TUR TUR TURTUR TURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTUR TURTUR TURTURTUR TURTURTURTURUSA

USAUSA

USAUSA

USA

USA

USAUSA

USA

USAUSAUSAUSAUSAUSA

USA

USAUSA

USA

USAUSA

USA

USAUSA

USA

USAUSAUSA

USAUSAUSA

USAUSA

USAUSA

USAUSAUSAUSA

USAUSAUSA

USAUSA

USAUSAUSA

USAUSAUSAUSAUSAUSA USA

USAUSAUSA

USA

USA

USAUSA

USAUSA USA

USA USA

USA

USA

USAUSAUSAUSA

USAUSA

USA

USA

USAUSAUSAUSAUSA

USA

USA USA

USAUSAUSAUSA

USAUSAUSAUSAUSA

USAUSA

USAUSA

USAUSA VENVENVENVENVEN VEN VENVEN VEN VENVENVEN VEN VENVEN VEN VENVEN VENVENVENVEN VENVENVEN VENVEN VENVENVEN VENVENVEN VENVENVENVENVENVENVEN VENVEN VENVENVENVENVEN VEN VENVENVEN VENVEN VEN VENVENVEN VEN VENVEN VENVEN VENVEN VENVEN VENVEN VEN VENVEN VENVENVEN VENVENVEN VENVEN VENVEN VENVEN VEN VENVENVENVENVENVEN VENVENVEN VENVENVEN VENVEN VENVENZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAFZAFZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAFZAFZAF ZAF ZAFZAF ZAFZAFZAFZAFZAFZAF ZAF ZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAF

-4.0

4-4

.02

-4-3

.98

-3.9

6Es

timat

ed e

xcha

nge

rate

ela

stic

ity

-.4 -.2 0 .2 .4Exchange rate shock

Specification 4: dln approximationExchange rate shock vs. magnitude of exchange rate bias

(c) Log-approximation

ARG ARGARGARGARG ARGARG ARGARGARG ARGARGARGARG ARGARG ARG ARGARGARG ARGARGARGARGARG ARG ARGARG ARGARGARGARGARG ARGARGARGARG ARG ARGARGARGARGARGARG ARGARG ARGARG ARG ARGARGARGARG ARGARG ARGARGARG ARGARGARG ARG ARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARGARGARG ARGARGARGARGARGARGARGARG ARGARGARG ARGARG ARG ARGARGARGARG ARGARGARG ARGARGAUS AUSAUSAUSAUS AUS AUS AUSAUSAUS AUSAUSAUSAUS AUSAUSAUSAUS AUS AUSAUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUSAUS AUSAUS AUSAUSAUSAUSAUS AUS AUSAUS AUSAUSAUSAUSAUS AUS AUS AUS AUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUSAUS AUSAUSAUS AUSAUSAUSAUSAUSAUS AUSAUSAUS AUSAUSAUS AUSAUSAUSAUS AUSAUS AUSAUS AUTAUT AUTAUTAUTAUTAUT AUTAUT AUT AUTAUTAUTAUTAUT AUT AUTAUTAUT AUTAUTAUT AUTAUT AUTAUT AUTAUT AUTAUTAUT AUT AUT AUTAUTAUT AUTAUT AUT AUT AUTAUTAUTAUTAUT AUT AUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUT AUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTAUTAUT BEL BELBELBEL BELBEL BELBELBELBEL BEL BELBELBEL BEL BELBEL BELBELBELBELBEL BEL BELBELBELBEL BELBEL BELBELBEL BELBEL BELBELBELBEL BEL BELBEL BELBELBELBELBELBEL BELBELBEL BELBELBEL BEL BELBELBELBELBEL BELBELBEL BELBEL BELBELBEL BELBELBEL BELBELBEL BELBEL BELBEL BELBELBEL BELBELBELBELBEL BELBEL BELBELBEL BEL BELBEL BELBEL BELBEL BELBEL BELBRABRA BRABRABRABRABRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRA BRABRABRABRABRA BRABRA BRA BRABRABRABRABRA BRABRABRABRA BRABRABRABRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRABRABRABRABRABRA BRABRA BRA BRABRABRA BRABRA BRABRABRA BRABRA BRABRABRA BRABRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRABRABRA BRABRA BRABRA BRACANCANCANCAN CAN CANCAN CANCAN CAN CANCAN CANCANCANCANCANCAN CANCAN CANCANCANCAN CANCAN CANCANCAN CANCANCAN CAN CAN CANCANCANCAN CANCANCANCANCAN CANCAN CAN CANCAN CANCAN CANCAN CANCANCANCANCAN CANCANCAN CANCAN CANCANCAN CANCAN CANCAN CAN CANCANCANCANCAN CANCANCAN CANCAN CAN CANCAN CANCAN CANCANCANCAN CAN CANCANCAN CANCANCANCAN CANCAN CANCHE CHECHECHECHECHECHE CHECHECHE CHECHE CHECHE CHECHECHE CHE CHECHECHECHECHECHE CHECHECHE CHE CHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHECHECHECHE CHECHE CHECHECHECHE CHECHECHECHE CHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHE CHECHECHE CHE CHECHECHECHECHECHECHECHE CHECHECHE CHECHECHECHE CHECHECHECHE CHE CHECHE CHECHECHE CHECHL CHLCHL CHL CHLCHLCHL CHLCHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHLCHLCHL CHLCHL CHL CHLCHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHL CHL CHLCHL CHLCHLCHL CHL CHL CHLCHLCHLCHL CHLCHLCHLCHL CHLCHLCHLCHL CHL CHL CHLCHLCHL CHL CHLCHL CHLCHLCHLCHLCHLCHL CHLCHLCHLCHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHLCHL

CHNCHNCHNCHN CHNCHNCHNCHNCHNCHN CHNCHNCHNCHN CHN CHNCHNCHNCHNCHN

CHNCHN CHNCHN

CHNCHN CHNCHNCHN CHN

CHNCHNCHN CHNCHN CHNCHNCHNCHNCHNCHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN

CHN CHN CHNCHNCHNCHNCHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHNCHNCHN

CHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHNCHNCHNCHN CHNCHNCHNCHN CHNCHNCHNCHN CHN CHN

COL COLCOLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOLCOL COLCOLCOL COLCOLCOLCOL COLCOLCOL COL COLCOLCOL COL COLCOLCOLCOLCOL COLCOL COL COLCOL COLCOLCOLCOLCOL COL COLCOLCOLCOL COLCOL COLCOL COLCOL COLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOLCOL COL COLCOLCOLCOLCOLCOLCOL COLCOLCOLCOL COL COL COLCOL COLCOLCOL COLCOLCOL COL

DEUDEUDEUDEUDEU

DEUDEUDEUDEUDEUDEUDEU

DEUDEU

DEU

DEUDEUDEUDEU

DEU

DEUDEUDEUDEUDEU DEUDEU

DEUDEU DEU

DEUDEUDEUDEU

DEUDEUDEUDEU

DEU

DEUDEU

DEU

DEUDEU

DEUDEUDEU

DEUDEU DEUDEU DEUDEUDEU DEUDEUDEU

DEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEUDEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEUDEUDEU

DEUDEU

DEU DEU DEUDEU DEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DNK DNKDNKDNKDNK DNKDNKDNK DNKDNK DNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNKDNK DNKDNKDNKDNK DNKDNKDNKDNK DNKDNK DNKDNKDNKDNKDNK DNK DNKDZA DZADZA DZADZADZADZA DZA DZADZADZADZA DZADZA DZADZA DZADZADZADZADZADZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZA DZA DZADZADZADZA DZADZADZA DZADZADZADZA DZADZADZADZADZADZA DZA DZADZADZA DZADZADZA DZADZADZADZADZADZADZA DZA DZADZA DZADZA DZA DZADZADZA DZADZA DZADZA DZADZADZA DZADZA DZADZA DZADZADZADZA DZADZADZA DZADZA DZADZADZADZAEGY EGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGY EGYEGYEGYEGYEGY EGYEGYEGY EGYEGY EGY EGYEGY EGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGYEGY EGYEGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGYEGYEGYEGYEGYEGY ESPESP ESPESP ESPESPESP ESPESP ESPESPESP ESPESP ESPESPESPESPESP ESPESPESP ESPESP ESP ESPESP ESPESPESPESP ESPESPESPESPESP ESP ESPESP ESPESPESP ESPESPESP ESPESPESP ESPESP ESPESPESP ESPESP ESPESP ESPESP ESPESPESPESPESPESPESP ESPESP ESPESP ESPESPESP ESPESP ESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESP ESPESPESP ESPESP ESP ESPESPESP ESPFINFIN FIN FINFIN FINFINFIN FINFINFINFIN FIN FINFINFIN FINFIN FINFIN FINFIN FIN FINFINFINFIN FIN FIN FINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFIN FINFINFINFINFIN FIN FIN FINFINFIN FINFINFINFIN FINFINFIN FINFIN FINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FIN FINFINFIN FINFINFINFINFINFINFIN FINFIN FINFIN FINFINFINFINFIN FIN

FRAFRAFRA

FRAFRA

FRAFRAFRAFRAFRA FRA FRAFRA FRAFRAFRAFRAFRAFRAFRA FRAFRA FRAFRAFRAFRA FRAFRA FRA FRAFRAFRAFRAFRAFRAFRA

FRA FRA FRAFRAFRAFRA

FRAFRAFRA FRAFRA FRAFRA FRAFRAFRAFRA FRAFRAFRAFRA

FRAFRAFRA FRAFRA FRAFRAFRAFRAFRA FRAFRA FRAFRA

FRAFRAFRAFRAFRA

FRAFRAFRAFRA FRAFRAFRA

FRAFRAFRAFRAFRAFRAFRAFRAFRAFRA

FRA FRAFRAFRAFRA

FRAFRAGBRGBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBR GBRGBR GBRGBR

GBRGBRGBRGBRGBRGBRGBR GBRGBRGBRGBRGBRGBRGBRGBR

GBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBR

GBRGBRGBR GBRGBRGBR

GBRGBR GBRGBR GBRGBRGBRGBRGBR

GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR

GBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBRGBR GBRGBR GBR GBRGBR GBRGBR GBR

GRCGRC GRC GRCGRC GRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRC GRCGRCGRC GRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRC GRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRCGRCGRCGRCGRCGRCGRC GRCGRCINDIND INDINDINDIND INDIND INDIND INDIND INDIND INDINDIND INDIND IND INDINDIND INDIND IND INDINDIND INDINDINDIND INDIND INDINDINDINDIND IND INDINDINDIND INDINDINDIND INDINDIND INDIND IND INDINDINDIND IND INDIND INDIND INDIND INDIND IND INDINDINDIND IND INDINDINDIND INDINDINDINDIND INDINDINDIND IND INDINDIND INDIND INDIND INDIND INDINDIND IRLIRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRLIRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRLIRL IRLIRLIRL IRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRLIRLIRL IRLIRLIRLIRLIRL IRLIRL IRLIRLIRLIRLIRL IRLIRLIRL IRLIRLIRL IRL IRLIRL IRLIRLIRLIRL IRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRLIRL

ISRISRISR ISR ISRISR ISRISRISRISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISR ISRISR ISRISR ISRISRISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISR ISRISR ISRISRISRISR ISR ISRISRISRISR ISR ISRISR ISRISRISRISRISR ISRISR ISRISRISR ISR ISRISRISR ISRISR ISRISRISRISRISRISR ISRISRISR ISRISRISRISR ISRISRISR ISR ISRISR ISR ISRISRISRISRISRISR ISRITAITA ITA ITAITAITAITA ITAITAITAITAITA ITAITA

ITA ITA ITAITA ITAITA ITAITA ITAITAITAITA

ITAITA

ITA ITAITAITAITA ITA ITAITAITA ITAITAITAITA ITA

ITA ITAITA ITAITA ITAITA ITAITA ITAITA ITAITA ITAITAITA

ITAITA ITAITAITAITA ITAITAITAITA ITAITA ITA

ITA ITAITA ITAITAITA ITAITA ITAITAITA ITAITAITA ITAITA ITAITAITA ITA ITAITAITA ITAITAITAITAITAITA

JPNJPNJPNJPNJPNJPN

JPNJPN

JPN JPNJPN

JPN

JPNJPNJPNJPNJPNJPN

JPNJPN JPN

JPNJPNJPNJPNJPN

JPNJPN

JPNJPNJPNJPN

JPN

JPN JPNJPNJPNJPN JPNJPN JPN

JPNJPN

JPNJPN

JPNJPN

JPNJPNJPN JPN JPNJPN

JPNJPNJPNJPN JPN

JPNJPNJPNJPN

JPN

JPNJPN

JPN JPNJPN

JPNJPNJPN JPNJPN

JPNJPN

JPNJPNJPN

JPNJPN

JPNJPNJPN JPNJPN

JPNJPN JPNJPNJPNJPNJPN

JPNJPN

JPNJPN

JPN JPNJPN

JPN

KORKORKORKORKORKOR KORKORKORKORKOR KOR KORKOR

KOR KORKOR KORKOR KORKOR KORKORKORKOR KORKOR KORKORKOR KORKOR KORKOR KORKORKORKORKORKORKORKOR KOR

KOR KOR KORKOR KORKORKOR KOR KORKORKORKOR

KORKOR KORKORKOR KORKOR KOR KORKORKOR KORKOR KORKORKOR KORKOR

KORKORKOR KORKORKORKOR KORKORKORKOR KORKORKORKORKORKORKOR KOR KORKOR KORKORKOR

KORKORKOR

MEXMEXMEX MEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEX MEXMEXMEX MEX MEXMEXMEX MEX MEXMEXMEX MEXMEX MEXMEXMEX MEX MEXMEXMEXMEX MEX MEXMEXMEXMEXMEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEXMEXMEXMEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEX MEX MEXMEXMEX MEXMEXMEXMEX MEXMEXMEX MEXMEX MEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEXMYSMYS MYSMYSMYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYS MYSMYSMYSMYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSMYSMYS MYS MYSMYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYS MYSMYS MYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYSMYSNOR NOR NORNORNORNORNORNORNOR NORNORNORNOR NORNORNOR NORNORNORNORNOR NORNOR NORNOR NORNORNORNORNORNORNORNOR NORNORNOR NORNOR NORNORNOR NORNORNORNOR NORNORNORNORNORNORNORNORNOR NOR NORNOR NORNORNORNOR NORNOR NORNORNOR NORNOR NORNOR NORNORNOR NOR NORNORNORNOR NORNOR NORNORNORNOR NORNORNORNORNOR NOR NORNOR NORNORNORNOR NORNORNORNORNZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZL NZLNZLNZL NZLNZL NZLNZL NZL NZLNZLNZLNZL NZLNZL NZLNZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZL NZL NZLNZLNZLNZL NZLNZL NZLNZLNZLNZL NZLNZL NZLNZL NZLNZLNZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZLNZL NZLNZLNZL NZL NZLNZLNZL NZLNZLNZL NZLNZLNZL NZLNZLPAK PAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAK PAK PAKPAK PAK PAKPAK PAK PAKPAKPAKPAK PAK PAK PAKPAKPAK PAKPAK PAKPAK PAK PAKPAKPAKPAKPAKPAKPAKPAKPAKPAKPAK PAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAKPAKPAK PAKPAKPAKPAKPAK PAKPAK PAKPAK PAKPERPER PERPER PER PERPER PER PERPERPER PERPER PERPERPER PERPERPERPER PERPER PERPER PERPER PERPER PERPERPER PERPER PERPER PER PERPERPERPERPER PERPER PERPERPER PERPER PERPERPER PERPERPER PERPERPERPERPERPER PER PERPERPER PERPER PERPER PERPER PER PERPER PERPER PERPER PER PERPERPER PERPER PERPERPER PERPER PERPER PERPERPER PERPERPERPER PERPERPER PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHLPHL PHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPHL PHL PHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHLPHLPHL PHLPRTPRT PRTPRT PRT PRTPRTPRTPRTPRTPRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRT PRT PRTPRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRTPRTPRTPRTPRTPRT PRT PRTPRTPRT PRTPRT PRTPRT PRTPRTPRTPRTPRT PRT PRTPRTPRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRT RUSRUSRUS RUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUSRUS RUS RUSRUSRUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUSRUSRUSRUS RUSRUSRUS SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWE SWE SWESWE SWESWE SWESWESWE SWESWE SWESWE SWESWESWE SWESWESWESWE SWE SWESWESWESWESWE SWE SWESWE SWESWE SWESWE SWE SWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWESWESWE SWE SWESWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWE SWESWESWESWE SWETURTURTUR TURTURTURTURTURTURTUR TURTURTURTURTUR TURTUR TURTURTUR TURTURTURTURTURTURTUR TURTUR TUR TURTURTUR TURTUR TURTUR TURTURTURTURTURTUR TURTUR TURTURTURTURTUR TURTURTURTUR TURTURTUR TURTURTUR TURTUR TUR TUR TURTUR TURTURTURTUR TUR TURTURTUR TURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTUR TUR TURTUR TURTUR TURTURTUR TURTURTURTUR

USA USAUSA

USAUSA

USAUSA

USAUSAUSA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSA

USAUSA

USAUSA

USA USAUSA USAUSA

USA USAUSAUSAUSA

USAUSA USAUSAUSA

USAUSAUSAUSA

USAUSA

USAUSAUSA

USAUSAUSAUSAUSA USAUSA

USAUSAUSAUSA

USA

USAUSAUSA

USAUSA

USA USAUSA

USA

USAUSAUSAUSAUSA

USAUSA

USAUSAUSAUSAUSAUSAUSAUSA USA

USAUSAUSAUSA USAUSAUSAUSAUSA

USAUSAUSA

USAUSAUSA

VENVENVENVENVEN VEN VENVEN VEN VENVENVEN VEN VENVEN VEN VENVEN VENVENVENVEN VENVENVEN VENVEN VENVENVEN VENVENVEN VENVENVENVENVENVENVEN VENVEN VENVENVENVENVEN VEN VENVENVEN VENVENVEN VENVENVEN VEN VENVEN VENVEN VENVEN VENVEN VENVEN VENVENVEN VENVENVEN VENVENVEN VENVEN VENVEN VENVEN VEN VENVENVENVENVENVEN VENVENVEN VENVENVEN VENVEN VENVENZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAF ZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF ZAF ZAFZAFZAFZAFZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAFZAF ZAFZAFZAFZAF ZAF ZAFZAF ZAFZAFZAFZAFZAFZAF ZAF ZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAFZAFZAF

-4.2

-4-3

.8-3

.6-3

.4Es

timat

ed e

xcha

nge

rate

ela

stic

ity

-.5 0 .5Exchange rate shock

Specification 5: Alternative weightsExchange rate shock vs. magnitude of exchange rate bias

(d) Alternative weights

Figure 1: MTI: Relationship between an exchange rate shock and the bias of the exchange rate elasticity forθ = 4.

17

Table 2: GETI simulated elasticities of country-specific random exchange rate shocks

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5)

Exchange rateMean -4 -3.74 -4 -4.001 -3.918Bias 0 .26 0 0.001 .082Std dev. 0 .045 .019 .032 .022MSE 1/2 0 .264 .019 .032 .085

Foreign demandMean 1 .988 1.004 1.004 1.002Bias 0 .012 .004 .004 .002Std dev. 0 .023 .053 .053 .053MSE 1/2 0 .026 .053 .053 .053

Notes: The sample consists of 39 countries and each country receives 100 random exchange rate shocks. The total numberof estimated exchange rate and demand elasticities is 3900 for each of the 5 different specifiations. The top cell labeled"Mean" reports the sample mean of the respective estimates for each type of elasticity. The rows labeled "Bias" give theestimated bias, where est. bias = sample mean - true value. Rows labeled "Std Dev." give the sample standard deviationof the 3900 point estimates. Rows labeled "MSE1/2" give the square root of the estimated mean squared error (MSE),where estimated MSE = (est. bias)2 + (std dev)2.

4.2 General Equilibrium Trade Integration (GETI) counterfactual

In the GETI counterfactual, we allow wages to adjust following an exchange rate shock. In particular,we impose that wages have to adjust in order to keep the current account imbalance constant ininternational currency. To engineer an exchange rate shock in the general equilibrium, we use thesame exchange rate shocks as in the MTI part. When a country receives an idiosyncratic exchangerate shock, the exchange rate does not change for other countries. However, exports change for allcountries because prices and wages adjust after the shock. Table 2 presents the general equilibriumresults using a trade elasticity of 4.

The direction and the magnitude of the underlying biases in the exchange rate elasticities aresimilar to the MTI version. Wrong functional form assumptions and incorrect weighting schemesin the scenarios “Gold medal mistake” and “Alternative weights” bias the exchange rate elasticitytowards zero. The key difference is the increase in the estimation error captured by the MSE. Figures2 and 3 illustrate this change by plotting the bias in the exchange rate and the demand elasticity asa function of the exchange rate shock for the four different scenarios. In the GETI counterfactualan exchange rate shock leads to a much larger estimation bias than in the MTI. The reason whythe average biases are small is that they move in the opposite direction of the exchange rate shock(appreciation leads to upward bias and depreciation leads to downward bias) and cancel each otherout when averaging.

18

ARGARG ARGARGARG ARGARG ARGARGARGARG ARGARGARGARGARGARG ARG ARGARG ARGARGARGARGARG ARGARGARG ARGARGARGARGARGARGARG ARGARG ARGARG ARGARG ARGARGARG ARG ARGARGARG ARGARG ARG ARGARGARGARGARGARG ARGARGARG ARG ARGARGARG ARGARGARG ARGARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARG

AUSAUS AUSAUSAUSAUSAUS AUS AUSAUS AUSAUS AUSAUS AUSAUSAUS AUSAUS AUSAUS AUSAUS AUSAUS AUSAUSAUSAUS AUSAUS AUS AUSAUSAUSAUS AUSAUSAUS AUS AUSAUS AUSAUS AUSAUSAUSAUS AUSAUSAUS AUS AUSAUSAUS AUS AUSAUSAUSAUS AUSAUS AUS AUSAUSAUS AUS AUSAUSAUS AUSAUS AUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUS

AUT AUT AUTAUT AUTAUTAUTAUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUT AUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUT AUTAUT AUTAUT AUT AUTAUTAUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUT AUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTBELBEL BELBEL BELBELBEL BELBEL BELBELBEL BELBELBELBEL BEL BELBELBEL BELBELBEL BELBELBEL BELBELBELBELBEL BELBELBEL BELBELBEL BELBEL BELBEL BELBEL BELBEL BEL BELBEL BELBELBEL BELBELBEL BEL BELBEL BEL BEL BELBEL BELBEL BELBEL BEL BELBEL BELBEL BELBELBELBELBELBEL BEL BELBEL BELBEL BELBELBEL BEL BELBEL

BRA BRA BRABRABRA BRABRA BRABRABRABRA BRABRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRABRA BRABRA BRA BRABRA BRABRA BRABRA BRA BRABRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRA BRABRA BRABRABRABRA BRABRA BRABRA BRABRABRACANCAN CANCANCANCAN CAN CAN CANCANCANCANCANCANCANCAN CANCAN CANCANCAN CANCANCAN CANCAN CANCAN CANCANCANCANCAN CANCANCAN CANCANCANCANCAN CANCANCANCAN CANCANCANCAN CANCANCAN CANCANCAN CANCANCAN CANCANCAN CAN CANCANCANCAN CANCAN CANCANCAN CANCAN CANCANCAN CANCAN CAN CANCAN

CHECHECHECHECHECHECHECHECHE CHECHECHE CHECHE CHE CHECHECHECHECHECHECHE CHECHE CHECHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHECHE CHE CHECHECHECHECHE CHECHE CHECHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHE CHECHE CHECHE CHECHECHECHE CHECHE CHECHECHE CHECHE CHECHECHE CHECHECHE CHECHE CHECHLCHLCHL CHLCHL CHLCHLCHLCHLCHL CHL CHLCHLCHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHL CHLCHLCHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHLCHLCHL CHL CHLCHLCHL CHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHL CHL CHLCHL CHLCHLCHLCHL

CHNCHN CHN CHNCHN CHNCHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHNCHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN CHNCHNCHNCHN CHN CHN CHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHN CHNCHNCHNCHN CHN CHNCHNCOLCOLCOL COLCOL COLCOLCOLCOL COL COLCOLCOL COL COLCOLCOLCOL COLCOL COL COLCOLCOL COLCOL COLCOL COLCOL COLCOL

COLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOL COLCOL COLCOL COL

COLCOLCOL COLCOL COLCOLCOLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOL COL

DEUDEU DEUDEUDEUDEU DEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEUDEU DEU DEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEU DEUDEU DEUDEUDEU DEUDEU DEUDEUDEU DEUDEU DEUDEUDEU DEUDEUDEU DEUDEUDEU DEUDEUDEU DEU DEUDEU DEUDEU DEUDEUDEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEUDEUDEUDEUDEU DEUDEUDEU DEUDEU DEUDEUDEU

DNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNK DNKDNK DNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNK DNK DNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNK DNKDNKDNKDNK DNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNK

DZADZADZA

DZADZADZA

DZADZADZA DZADZADZA DZADZA DZA DZADZADZA DZADZA

DZA DZADZA DZADZADZADZA

DZA DZA DZADZADZA DZADZA DZADZADZA DZADZADZA DZADZA

DZA DZA DZADZADZADZA

DZA DZA DZADZADZADZADZADZADZA DZA

DZADZADZADZA DZADZADZA

DZADZADZADZA DZADZADZA DZADZA DZADZADZA

DZAEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGYEGYEGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGY EGYEGY EGY EGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGY EGY EGYEGY EGYEGYEGYEGY EGYEGYEGYEGY EGYEGY EGY EGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGYEGY EGY EGY EGYEGYEGY

ESPESPESPESP ESPESPESPESP ESPESPESPESP ESPESP ESPESP ESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESPESPESPESPESP ESPESPESPESPESPESP ESP ESPESPESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESP ESPESPESPESP ESP ESPESPESPESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESPESPESPESPESP ESPESPESPESP ESPESP ESP

FINFINFIN FINFINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFINFIN FIN FINFINFIN FINFINFIN FINFIN FINFIN FINFIN FINFINFIN FINFIN FIN FIN FIN FINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFINFIN FINFINFINFIN FINFINFIN FIN

FRA FRAFRAFRAFRAFRAFRA FRAFRA FRA FRAFRA FRAFRAFRA FRAFRA FRAFRAFRA FRAFRAFRA FRAFRA FRAFRAFRAFRA FRAFRA FRAFRAFRA FRAFRA FRAFRAFRA FRAFRA FRAFRA FRA FRAFRA FRAFRA FRAFRA FRAFRAFRA FRAFRAFRA FRAFRAFRAFRA FRA FRAFRA FRAFRA FRAFRAFRA FRA FRA FRAFRAFRAFRAFRA FRAFRAFRAFRAFRA FRAFRAFRAFRA FRA FRAFRAFRAFRA FRA FRAFRAFRAFRA FRA

GBR GBRGBR GBRGBR GBRGBR GBRGBRGBR GBR GBRGBR GBRGBR GBRGBRGBR GBRGBRGBRGBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBRGBR GBR GBR GBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBR GBR GBR GBRGBRGBRGBRGBR GBRGBRGBRGBR GBRGBR GBRGBR GBR GBRGBR GBRGBR GBRGBR GBR GBRGBRGBRGBRGBRGBR GBRGBRGBR GBRGRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCGRC GRCGRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCIND IND INDINDINDINDINDINDIND INDIND INDINDINDIND INDINDINDIND INDINDIND INDINDIND IND INDINDIND INDIND INDIND INDINDIND IND INDINDIND INDINDIND INDINDIND INDIND IND INDIND INDIND INDIND INDINDIND IND INDINDINDIND IND INDIND INDIND INDINDIND INDINDIND INDINDINDIND INDIND INDINDIND INDIND

IRL IRLIRLIRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRL IRLIRL IRLIRL IRLIRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRLIRLIRLIRL IRL IRL IRLIRLIRLIRL IRLIRL IRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRLISR ISR ISRISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISRISR ISRISRISRISRISR ISR ISRISRISR ISRISRISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISRISRISR ISRISRISR ISRISR ISR ISR ISRISRISR ISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISR

ITAITA ITAITAITAITA ITAITAITA ITAITAITAITA ITAITA ITA ITAITA ITAITA ITAITAITAITAITA ITA ITAITA ITAITA ITAITAITA ITAITA ITAITAITA ITAITAITA ITAITAITA ITAITA ITAITAITA ITA ITA ITAITAITA ITA ITAITA ITAITAITA ITAITA ITAITA ITAITAITA ITAITA ITAITAITA ITA ITAITA ITAITA ITAITAITA ITA ITAITA

JPNJPN JPN JPNJPNJPN JPNJPN JPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPN JPNJPNJPN JPN JPNJPNJPNJPNJPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPNJPNJPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPN JPNJPNJPNJPNJPN KOR KORKORKORKOR KOR KORKORKOR KORKORKOR KORKOR KORKORKORKORKORKOR KORKOR KORKORKOR KORKORKOR KORKORKOR KOR KORKOR KORKORKOR KORKOR KORKORKOR KOR KOR KORKOR KORKOR KORKOR KORKOR KORKORKORKORKOR KORKOR KOR KORKORKOR KOR KORKOR KOR KORKORKOR KORKORKOR KOR KORKORKOR KORKOR KORKOR KORKOR KORKOR KOR KORKOR

MEX MEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEX MEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEX MEX

MYS MYSMYSMYS MYS MYSMYS MYS MYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYSMYSMYSMYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYSMYSMYS MYSMYSMYSMYS MYSMYSMYS MYSMYSMYSMYS MYS MYSMYSMYSMYSMYSMYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYS MYS MYSMYS MYSMYS MYSMYS MYS

NORNOR NORNOR NORNOR NOR NORNORNOR NORNORNORNOR NORNOR NOR NORNOR NOR NORNORNOR NORNOR NORNOR NORNORNOR NORNOR NORNORNOR NORNORNOR NORNOR NORNOR NORNORNOR NORNORNOR NOR NORNORNORNORNOR NOR NORNORNORNORNORNORNORNORNOR NORNORNORNORNORNOR NOR NORNORNORNORNORNOR NORNORNORNOR NOR NORNOR

NZL NZLNZL NZLNZLNZLNZL NZLNZLNZL NZLNZLNZLNZLNZLNZL NZLNZLNZL NZLNZLNZL NZL NZLNZL NZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZLNZL NZLNZL NZL NZLNZLNZLNZL

PAKPAK PAKPAK PAK PAKPAK PAK PAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAKPAKPAKPAK PAKPAK PAK PAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAK PAKPAK PAKPAK PAK PAKPAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAK PAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAK PAKPAK PAKPAKPAK PAKPAKPAK PAK

PERPER

PER PERPERPER PERPER PERPERPERPER PERPERPERPER PERPERPER PER PERPERPER PERPER PERPER PER

PERPER PERPERPERPERPER PERPER

PER

PER

PER

PERPER PERPERPER PERPERPER PERPER PER

PERPERPERPER

PERPERPER

PERPERPER PER PER

PERPER PERPERPER

PER PERPERPER

PERPERPER PERPER

PERPER PERPER PER

PHLPHLPHL PHLPHLPHLPHL PHLPHL PHL PHLPHL PHL PHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHL PHLPHL PHLPHLPHL PHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL

PHL PHL PHLPHLPHL PHL

PRTPRTPRT PRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRTPRTPRT PRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRTPRTPRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT

RUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUSRUS RUS RUSRUS RUSRUS RUSRUS RUSRUSRUS

RUSRUS RUS RUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUS RUSRUSRUSRUS RUS RUSRUS RUSRUS RUS RUSRUSRUS

SWESWE SWESWE SWE SWESWESWESWE SWESWESWESWESWESWESWE SWESWESWE SWESWESWESWESWESWESWE SWE SWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWE SWESWESWE SWESWESWE SWESWE SWESWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWE SWESWE SWESWE SWE

TURTURTUR TUR TURTUR TURTUR TURTUR TUR TUR TURTURTURTURTUR TURTURTUR TURTURTUR TUR TURTURTURTUR TURTUR TUR TURTURTURTUR TURTURTURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTURTURTURTUR TURTUR TURTURTURTUR TUR TURTURTURTURTUR TUR TURTUR TURTUR TURTUR TURTUR TURTURTUR TUR

USA USAUSA USAUSAUSA USAUSA USAUSA USAUSAUSA USA USAUSA USAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSA USAUSAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USA USAUSAUSA USAUSAUSA USA USAUSAUSA USAUSA USA USAUSAUSAUSAUSA USAUSAUSA

VENVENVEN

VENVENVEN

VENVENVEN

VENVENVEN

VENVENVENVEN

VENVEN VEN

VENVENVENVEN

VEN

VENVENVENVENVEN VENVEN

VENVENVEN

VEN VENVEN VEN VENVENVENVENVENVEN VENVEN

VENVENVEN VENVEN VENVENVEN VENVENVENVENVENVENVEN

VENVEN VENVEN

VEN

VEN VENVENVENVEN

VENVENVENVENVEN

VENVEN

VEN

VENVEN

VENVENVEN VEN

VENVENVENVEN

VENVEN

ZAF ZAFZAFZAFZAF ZAFZAF ZAFZAF ZAFZAF ZAFZAFZAF

ZAFZAF ZAFZAF ZAFZAFZAFZAF

ZAFZAFZAFZAFZAFZAF

ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAF ZAFZAF ZAFZAFZAF ZAFZAFZAF

ZAF ZAFZAF ZAFZAF ZAFZAFZAFZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAFZAF ZAFZAF ZAFZAF ZAF

ZAFZAFZAF ZAF

ZAFZAFZAF ZAFZAF ZAF

-3.8

5-3

.8-3

.75

-3.7

-3.6

5-3

.6Es

timat

ed e

xcha

nge

rate

ela

stic

ity

-.6 -.4 -.2 0 .2Exchange rate shock

Specification 2: Gold medal mistakeExchange rate shock vs. magnitude of exchange rate bias

(a) Gold medal mistake

ARGARG ARGARGARG ARGARG ARGARGARGARG ARGARGARGARGARGARG ARGARGARG ARGARGARGARGARGARGARGARG ARGARGARGARGARGARGARG ARGARG ARGARG ARGARG ARGARGARG ARG ARGARGARG ARGARG ARG ARGARGARGARGARGARG ARGARGARG ARG ARGARGARG ARGARGARG ARGARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARG

AUSAUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUT AUT AUTAUTAUTAUTAUTAUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUT AUTAUT AUTAUT AUT AUTAUTAUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUT AUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUT

BELBELBEL

BELBELBELBEL

BELBEL

BELBELBEL

BELBELBEL

BEL

BELBEL

BELBEL BELBELBEL

BELBELBEL

BELBELBELBEL

BEL

BELBELBEL

BELBEL

BEL

BEL

BEL

BELBEL

BELBEL

BEL

BELBEL BEL

BEL

BELBELBEL

BELBELBELBEL

BEL

BEL BELBEL BEL

BEL BEL

BEL

BELBEL

BELBELBEL

BELBEL BELBELBELBEL

BELBEL

BEL BEL

BELBEL

BELBEL

BELBELBELBELBEL

BRA BRA BRABRABRA BRABRABRA

BRABRABRA BRABRABRA

BRABRABRA BRABRA BRABRA BRABRABRA

BRABRABRABRA BRABRABRA BRA BRABRA

BRABRABRA BRABRABRABRABRABRABRABRABRABRA BRABRA BRA BRA

BRA BRABRABRA

BRA BRA BRABRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRA BRABRA BRABRABRABRABRABRA BRABRA BRABRABRACAN

CANCANCAN

CANCANCAN

CAN CANCANCANCANCANCANCANCANCAN

CANCANCAN

CAN

CANCANCANCAN

CANCANCAN CANCANCANCANCAN

CANCANCAN CANCANCANCAN

CANCANCANCANCAN

CANCANCANCANCAN

CANCANCANCANCAN

CANCANCAN

CANCANCAN

CAN CANCANCANCANCAN

CANCAN

CANCANCAN

CAN

CANCANCAN CANCANCAN CANCANCHECHECHECHECHECHECHECHECHE CHECHECHE CHECHE CHE CHECHECHECHECHECHECHE CHECHE CHECHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHECHE CHECHECHECHECHECHE CHECHE CHECHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHE CHECHE CHECHE CHECHECHECHE CHECHE CHECHECHE CHECHE CHECHECHE CHECHECHE CHECHE CHECHLCHLCHL CHLCHL CHLCHLCHLCHLCHL CHL CHLCHLCHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHLCHLCHLCHL CHLCHLCHLCHLCHLCHL CHL

CHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHLCHLCHLCHLCHL CHL CHLCHLCHL CHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHL CHL CHLCHL CHLCHLCHLCHLCHNCHN CHNCHNCHNCHNCHNCHN CHNCHN CHNCHN CHN CHN

CHNCHN CHNCHNCHNCHNCHNCHN CHN

CHN

CHNCHN CHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHN

CHNCHN CHNCHNCHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHN CHNCHNCHN CHNCHN CHNCHNCHNCHNCHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHNCHN CHN CHN

CHNCHN CHNCHNCHNCHNCHN CHNCHN COLCOLCOL COLCOL

COLCOLCOLCOL

COL COLCOLCOL

COL COLCOLCOLCOLCOLCOL COL COL

COLCOL COLCOLCOL

COLCOLCOL COLCOLCOL COLCOL

COL

COLCOLCOLCOLCOL

COLCOL

COLCOLCOL COL

COLCOLCOL

COLCOL

COLCOL COLCOL COLCOL COLCOL

COLCOLCOLCOLCOLCOLCOLCOLCOLCOLCOL

COLCOL COLCOL

COLCOL

COLDEUDEU DEUDEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEUDEUDEUDEU DEU DEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEU DEUDEU DEUDEUDEU DEUDEU DEUDEUDEU DEUDEUDEUDEUDEU DEUDEUDEU DEUDEUDEU DEUDEUDEU DEU DEUDEU DEUDEU DEUDEUDEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEUDEUDEUDEUDEU DEUDEUDEU DEUDEU DEUDEUDEU DNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNK DNKDNK DNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNK DNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNK DNKDNKDNKDNK DNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNKDZADZADZA DZADZADZADZADZADZA DZADZADZA DZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZA DZA DZA DZADZADZA DZADZA DZADZADZA DZADZADZA DZA DZADZA DZA DZADZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZA DZADZADZA DZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZADZA DZAEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGY EGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGYEGYEGY EGYEGYEGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGYEGYEGY EGY EGYEGYEGY ESPESPESPESP ESPESPESPESP ESPESPESPESP ESPESP ESPESP ESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESPESPESPESPESP ESPESPESPESPESPESP ESP ESPESPESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESP ESPESPESPESP ESP ESPESPESPESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESPESPESPESPESP ESPESPESPESPESPESP ESP FINFINFIN FINFINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFINFIN FIN FINFINFIN FINFINFIN FINFIN FINFIN FINFIN FINFINFIN FINFIN FIN FINFIN FINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFINFIN FINFINFINFIN FINFINFIN FINFRA FRAFRAFRAFRAFRAFRAFRA

FRAFRA FRAFRAFRAFRAFRA FRAFRA FRAFRA

FRAFRAFRA

FRAFRA

FRA FRAFRAFRAFRAFRA

FRAFRAFRA

FRAFRAFRA FRAFRAFRA

FRAFRA

FRA

FRAFRA FRAFRA

FRAFRA

FRAFRA FRAFRAFRAFRAFRAFRA FRAFRAFRA

FRA FRA FRAFRA FRA

FRAFRAFRAFRAFRA FRA FRAFRAFRAFRAFRA

FRAFRAFRAFRAFRA

FRAFRAFRA

FRA

FRA FRAFRAFRAFRAFRA FRAFRAFRAFRAFRA GBR GBRGBR GBRGBR GBRGBR GBRGBRGBR GBR GBRGBR GBRGBR GBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBRGBRGBRGBR GBRGBRGBRGBR GBR GBRGBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBR GBR GBR GBRGBRGBRGBRGBR GBRGBRGBRGBR GBRGBR GBRGBR GBRGBRGBR GBRGBR GBRGBR GBR GBRGBRGBRGBRGBRGBR GBRGBRGBR GBRGRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCIND IND INDINDINDINDINDINDIND INDIND INDINDINDIND INDINDINDIND INDINDIND INDINDIND IND INDINDIND INDINDINDIND INDINDIND IND INDINDIND INDINDIND INDINDIND INDIND IND INDIND INDIND INDIND INDINDIND IND INDINDINDIND IND INDIND INDIND INDINDIND INDINDIND INDINDINDIND INDIND INDINDIND INDIND IRL IRLIRLIRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRL IRLIRL IRLIRL IRLIRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRLIRLIRLIRL IRL IRL IRLIRLIRLIRL IRLIRL IRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRLISR ISR ISRISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISRISR ISRISRISRISRISR ISR ISRISRISR ISRISRISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISRISR ISRISRISR ISRISR ISR ISR ISRISRISR ISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISRITA

ITAITAITAITAITA ITAITAITA ITAITAITA

ITAITA

ITAITA

ITAITA

ITAITA ITAITAITAITAITA ITA ITAITA

ITAITA

ITAITAITA ITAITA ITAITAITA ITAITAITAITAITAITA ITA

ITAITAITAITA ITA ITAITAITAITA ITA ITAITA ITAITAITA ITAITAITA

ITAITAITAITA ITAITA ITA

ITAITAITA ITAITAITAITA ITAITAITA ITA ITAITAJPNJPN JPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPNJPN JPN JPNJPNJPN JPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPN JPNJPNJPNJPNJPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPNJPNJPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPNJPNJPNJPNJPNJPN KOR KORKORKORKOR KOR KORKORKOR KORKORKOR KORKOR KORKORKORKORKORKOR KORKOR KORKORKOR KORKORKOR KORKORKOR KORKORKOR KORKORKOR KORKOR KORKORKOR KORKORKORKOR KORKOR KORKOR KORKOR KORKORKORKORKOR KORKOR KOR KORKORKOR KOR KORKOR KOR KORKORKOR KORKORKOR KOR KORKORKOR KORKOR KORKOR KORKOR KORKOR KOR KORKOR

MEX MEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEX

MEXMEX

MEXMEXMEXMEX

MEXMEXMEX MEXMEXMEX MEX

MEXMEXMEXMEX

MEXMEXMEX MEXMEXMEX MEXMEXMEXMEXMEX

MEXMEXMEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX MEX

MEXMEXMEXMEX MEXMEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEX MEXMYSMYS

MYSMYS

MYS MYSMYS MYS MYSMYSMYS MYSMYS

MYSMYS

MYSMYSMYS MYSMYSMYS

MYSMYS

MYSMYSMYSMYSMYSMYS

MYSMYS MYSMYSMYS MYSMYS

MYSMYSMYS MYSMYS

MYSMYSMYS

MYSMYSMYS

MYSMYSMYS MYSMYSMYSMYSMYSMYSMYSMYS

MYSMYSMYSMYS MYSMYS

MYSMYSMYSMYSMYSMYSMYSMYSMYSMYS

MYSMYSMYSMYS MYSMYS MYS

MYSMYS MYSMYSMYS

MYSMYS MYSMYS MYSNORNORNORNOR NORNOR NOR NORNORNOR NORNORNORNOR NORNOR NOR NORNOR NOR NORNORNOR NOR

NORNORNOR NORNOR

NORNORNOR NORNORNOR NORNORNOR NOR

NORNORNOR NORNORNORNORNORNORNOR NORNORNORNORNOR NOR NORNORNORNORNORNORNORNORNOR NORNORNORNORNORNOR NOR NORNORNORNORNORNOR NORNORNORNOR NOR NORNOR

NZLNZL

NZL

NZLNZLNZLNZL

NZLNZL

NZL

NZLNZLNZLNZLNZL

NZL

NZL

NZLNZLNZLNZL

NZLNZLNZL

NZLNZL

NZLNZLNZLNZL

NZL

NZLNZL

NZLNZL

NZL

NZL

NZLNZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZLNZLNZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZL

NZLNZL

NZLNZL

NZLNZLNZL

NZLNZL

NZLNZL

NZLNZLNZL

NZL

NZLNZL NZL NZLNZLNZL

NZLPAKPAK PAKPAK PAK PAKPAK PAK PAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAKPAKPAKPAK PAKPAK PAK PAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAKPAKPAK PAKPAK PAKPAK PAK PAKPAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAK PAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAK PAKPAK PAKPAKPAK PAKPAKPAK PAKPERPER PERPERPERPER PERPER PERPERPERPER PERPER PERPER PERPERPER PER PERPERPER PERPER PERPER PERPERPER PERPERPERPER

PERPERPERPERPER PER PERPER PERPER PER PERPERPER PERPER PERPERPERPERPER PER PERPERPER PERPER PER PERPERPER PERPERPERPERPERPERPERPER PERPER PERPERPERPER PERPER PERPHLPHLPHL PHLPHLPHLPHL PHLPHL PHL PHLPHL PHL PHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHL PHLPHL PHLPHLPHL PHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHL PHL PHLPHLPHL PHL PRTPRT

PRTPRT

PRTPRTPRTPRTPRTPRT

PRTPRTPRTPRTPRT

PRT PRTPRT PRT

PRTPRTPRTPRT

PRTPRTPRTPRTPRTPRTPRT PRT

PRTPRT PRTPRTPRT PRTPRTPRT PRT

PRTPRTPRT

PRTPRTPRTPRTPRTPRTPRTPRTPRTPRT PRTPRT

PRTPRT

PRTPRTPRT

PRT

PRT

PRTPRT PRT

PRTPRTPRT PRTPRT

PRTPRTPRT

PRTPRT

PRTPRT

PRTPRT RUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUSRUS RUS RUSRUS RUSRUS RUSRUS RUSRUS

RUSRUSRUSRUS RUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUS RUSRUSRUSRUS RUS RUSRUS RUSRUS RUS RUSRUSRUS SWESWE SWESWE SWE SWESWESWESWE SWESWESWESWESWESWESWE SWESWESWE SWESWESWESWESWESWESWE SWE SWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWESWESWE SWESWESWE SWESWE SWESWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWE SWESWE SWESWE SWE TUR

TURTUR TUR

TURTUR TURTUR TUR

TURTURTUR TURTURTURTURTUR

TURTUR

TURTURTURTUR TUR TUR

TURTURTURTURTUR TUR TURTURTURTUR

TURTURTURTURTUR

TURTUR TURTURTURTUR

TURTURTUR TURTURTURTUR

TUR

TURTUR

TURTURTURTUR TUR TURTURTURTURTUR TUR TUR

TUR TURTUR TUR

TUR TURTURTURTURTUR

TURUSA USAUSA USAUSAUSAUSAUSA USAUSA USAUSAUSA USA USAUSA USAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSA USAUSAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USA USAUSAUSA USAUSAUSA USA USAUSAUSA USAUSA USA USAUSAUSAUSAUSA USAUSAUSAVEN

VENVEN

VENVEN

VEN

VEN

VENVEN

VEN

VENVEN

VENVENVEN

VEN

VEN

VENVEN

VENVEN

VENVEN

VEN

VENVEN

VENVENVEN

VENVEN

VENVEN

VEN

VENVENVEN

VENVEN

VENVENVENVEN

VENVEN

VEN

VEN

VENVEN

VENVEN

VENVEN

VENVENVENVENVEN

VENVENVEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VEN

VEN

VEN

VENVENVEN

VEN

VEN

VEN

VEN

VEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VENZAF

ZAFZAFZAFZAF ZAFZAF

ZAFZAFZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAF ZAFZAFZAF

ZAF ZAFZAFZAFZAFZAFZAF ZAF

ZAFZAF ZAFZAFZAF

ZAFZAF ZAFZAFZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAFZAFZAFZAFZAF

ZAFZAF

ZAFZAFZAF ZAFZAFZAF

ZAF

ZAFZAF ZAF

ZAF ZAFZAFZAFZAF

ZAFZAFZAFZAF

ZAF

ZAF

ZAF

-4.4

-4.2

-4-3

.8Es

timat

ed e

xcha

nge

rate

ela

stic

ity-.5 0 .5

Exchange rate shock

Specification 3: REER a la McGuirkExchange rate shock vs. magnitude of exchange rate bias

(b) McGuirk

ARGARG

ARGARGARGARG

ARGARGARGARGARG

ARGARGARGARGARGARG ARG ARGARG

ARGARGARGARGARG ARGARGARG ARGARGARG

ARGARGARGARGARG

ARG ARGARGARG

ARG ARGARGARG ARGARG

ARGARGARG

ARGARG ARGARGARGARGARGARG ARG

ARGARG ARG ARGARGARG

ARGARGARG ARGARG

ARGARG ARGARGARGARG ARG ARGARGARG

ARGARG

AUSAUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUT AUT AUTAUT AUTAUTAUTAUTAUT

AUTAUT

AUTAUTAUTAUTAUTAUTAUTAUT AUTAUTAUTAUT

AUTAUT AUTAUT

AUTAUTAUTAUTAUT

AUT AUTAUT AUTAUTAUT AUTAUTAUTAUT

AUTAUTAUTAUT AUT AUTAUT

AUTAUT

AUT AUT AUTAUTAUTAUTAUTAUT

AUT AUTAUT

AUTAUTAUTAUTAUT

AUTAUTAUTAUT AUTAUTAUT AUTAUT

AUTAUTAUT AUTAUT AUTAUT AUTBELBEL BELBEL BELBELBEL BELBEL BELBELBEL BELBELBELBEL BEL BELBELBEL BELBELBEL BELBELBEL BELBELBELBELBEL BELBELBEL BELBELBEL

BELBEL BELBEL BELBEL BELBEL BEL BELBEL BELBELBEL BELBELBEL BEL BELBEL BEL BEL BELBEL BELBEL BELBEL BEL BELBEL BELBEL BELBELBELBELBELBEL BEL BELBEL BELBEL BELBELBEL BEL BELBELBRA BRA BRABRABRA BRABRA BRABRABRABRA BRABRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRABRA BRABRA BRA BRABRA BRABRA BRABRA BRA BRABRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRA BRABRA BRABRABRABRA BRABRA BRABRA BRABRABRACAN

CANCANCAN

CANCAN

CANCAN CANCANCANCANCANCAN

CANCAN

CAN

CAN

CANCAN

CAN

CANCANCAN

CANCAN

CANCAN CANCANCANCANCAN

CAN

CANCANCANCANCAN

CANCAN

CANCANCANCAN

CANCANCAN

CAN

CANCANCAN

CANCANCAN

CANCAN

CAN

CANCAN

CANCAN

CANCANCANCAN

CAN

CAN

CANCANCAN

CAN

CAN

CANCANCANCAN

CAN CANCAN

CANCHECHECHECHECHECHECHECHECHE CHECHECHECHECHE

CHE CHECHECHECHECHECHECHECHECHE CHECHECHE CHE

CHE CHECHECHECHECHECHE CHE CHECHECHECHE CHE CHECHECHECHE

CHECHE

CHE CHECHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHE CHECHE

CHECHE CHECHECHECHE CHECHE CHECHECHE CHECHE CHECHECHE CHECHECHECHECHE CHECHLCHLCHLCHLCHL CHL

CHLCHLCHLCHL CHL CHLCHLCHLCHLCHL CHL

CHL

CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL

CHLCHLCHL CHLCHLCHL CHL CHLCHLCHLCHLCHLCHL

CHLCHLCHLCHL

CHLCHLCHLCHLCHL CHLCHL CHLCHL CHLCHL

CHLCHLCHL CHLCHLCHL

CHLCHL CHLCHL

CHLCHL

CHLCHL CHLCHL

CHLCHLCHL CHLCHLCHLCHLCHL

CHLCHL CHL

CHLCHLCHLCHLCHL

CHNCHN CHN CHNCHN

CHNCHNCHN CHNCHN CHNCHN CHN CHN

CHNCHNCHNCHN

CHNCHNCHNCHN CHN

CHN

CHNCHN CHNCHN

CHNCHN

CHNCHN CHN CHNCHNCHN CHNCHN

CHN

CHNCHN CHNCHNCHN CHNCHNCHN CHNCHNCHNCHNCHN

CHNCHN CHNCHNCHNCHN CHN CHN CHNCHNCHN CHN

CHNCHN

CHNCHNCHNCHN

CHNCHN CHN CHNCHNCHNCHN

CHN CHNCHNCHNCHN CHNCHN

CHNCHN CHNCHNCHNCHN CHNCHN

CHN COLCOLCOL COLCOL COLCOLCOLCOL COL COLCOLCOL COL COLCOLCOLCOL COLCOL COL COLCOLCOL COLCOL COLCOL COLCOL COLCOL COL COLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOLCOLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOL COLDEUDEU DEUDEUDEU

DEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEUDEU

DEU DEUDEU

DEU DEUDEU DEU DEUDEUDEU DEUDEU DEU DEUDEU

DEUDEUDEU DEUDEU

DEUDEUDEU

DEUDEU DEUDEUDEU

DEUDEUDEU DEUDEUDEU

DEUDEUDEU DEU

DEUDEU DEUDEU DEUDEUDEUDEU DEU DEU

DEU DEUDEUDEUDEU DEU

DEUDEUDEUDEUDEUDEU

DEUDEUDEU DEUDEU DEUDEUDEU DNK

DNKDNK

DNKDNKDNKDNK DNKDNKDNK DNK DNKDNK

DNKDNKDNK DNK

DNK DNKDNK DNK DNKDNKDNKDNK

DNKDNK DNKDNK

DNKDNK

DNKDNKDNKDNK

DNKDNK

DNKDNKDNK DNKDNK

DNKDNKDNK DNK

DNK DNKDNKDNKDNK DNKDNK DNK DNKDNKDNK

DNKDNKDNKDNKDNKDNKDNKDNK

DNKDNKDNK

DNKDNKDNKDNKDNK

DNKDNK

DNK

DNK

DNKDZA

DZADZA

DZADZADZADZA

DZADZADZADZADZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZADZA

DZADZA

DZADZADZA

DZA

DZADZA

DZA

DZA

DZA

DZADZADZADZA

DZADZA

DZA

DZADZADZA

DZADZADZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZADZA

DZADZAEGY

EGYEGYEGY

EGYEGY

EGYEGY

EGYEGYEGYEGYEGY

EGYEGYEGY EGYEGY EGYEGYEGY

EGYEGY EGYEGY EGY EGY EGY

EGYEGY

EGYEGY

EGY EGY EGYEGY

EGY EGY EGYEGY EGYEGYEGYEGY

EGYEGYEGYEGY EGY

EGYEGY EGYEGY

EGY EGYEGYEGY

EGYEGYEGY EGY

EGYEGY

EGY

EGYEGY EGYEGYEGY EGYEGYEGY EGY

EGYEGYEGY EGYEGYEGY

EGYEGYEGYEGY EGY EGY EGY

EGYEGYESPESP

ESPESPESPESPESPESP

ESPESP

ESPESPESP

ESPESP

ESP

ESPESPESPESP

ESPESPESP ESP

ESPESPESP

ESPESPESP

ESPESPESPESPESPESPESPESPESPESPESP ESP

ESPESPESP

ESPESPESP

ESPESP ESP ESPESPESPESP

ESPESPESP

ESPESP

ESPESPESP ESPESP

ESPESPESPESP

ESPESP

ESPESP ESPESP

ESPESP

ESP

ESPESPESPESPESPESPESP

ESP

ESPESPESPESP ESP

ESP

ESP FINFINFIN FINFINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FIN

FIN FINFIN FINFINFIN FIN FINFINFIN FINFINFIN FINFIN FINFIN FINFIN FINFINFIN FINFIN FIN FIN FIN FINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFIN

FINFINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFINFIN FINFINFINFIN FINFINFIN FIN

FRAFRAFRA

FRAFRAFRA

FRA

FRA

FRA

FRAFRAFRA FRA

FRAFRA

FRAFRA

FRAFRA

FRA

FRAFRA

FRA

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRAFRA

FRAFRA

FRAFRAFRA

FRAFRA

FRA

FRA

FRA

FRAFRA

FRA

FRA

FRA

FRAFRA

FRAFRAFRA

FRAFRAFRA FRA

FRAFRAFRA

FRA FRAFRA FRA

FRA

FRAFRAFRA FRAFRA

FRAFRAFRAFRA

FRA

FRAFRAFRA

FRA

FRA

FRAFRA

FRA

FRA

FRA FRAFRAFRAFRA FRA

FRAFRAFRAFRA

FRA GBR GBRGBR

GBRGBR

GBRGBR GBR

GBRGBR GBRGBR

GBRGBRGBR GBRGBR

GBRGBRGBRGBR

GBRGBRGBRGBR GBR

GBRGBRGBRGBRGBRGBRGBR

GBR GBR GBRGBR GBR

GBRGBR

GBRGBRGBRGBRGBRGBRGBRGBR

GBRGBRGBRGBRGBRGBRGBR

GBR GBRGBR GBRGBRGBRGBR

GBRGBRGBR

GBRGBRGBR

GBR GBRGBR

GBR GBRGBRGBR

GBRGBR

GBRGBR GBRGBRGBRGBRGBRGBR GBR

GBRGBRGBRGRC

GRCGRCGRCGRCGRC

GRC

GRCGRC GRCGRCGRCGRC

GRCGRC

GRC

GRCGRCGRCGRCGRC

GRCGRC

GRCGRCGRC GRCGRCGRCGRC

GRCGRCGRC

GRCGRC

GRCGRC

GRCGRCGRCGRC GRC

GRCGRCGRCGRCGRC

GRCGRCGRC

GRCGRC GRC

GRCGRCGRC

GRCGRCGRCGRC

GRCGRC GRC

GRC

GRCGRCGRCGRCGRC

GRCGRC

GRCGRC

GRC

GRCGRCGRCGRCGRCGRCIND IND INDINDINDINDINDINDIND

INDIND INDINDINDIND INDINDINDIND INDINDIND

INDINDIND IND

INDINDIND

INDIND INDINDINDIND

INDIND IND

INDINDINDIND

IND INDINDIND INDIND IND INDIND

INDIND IND

IND INDINDIND INDINDINDINDIND IND IND

INDIND

INDINDINDIND INDINDIND

INDINDINDIND INDIND INDINDIND

INDIND IRL IRLIRLIRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRL IRLIRL IRLIRL IRLIRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRLIRLIRLIRL IRL IRL IRLIRLIRLIRL IRLIRL IRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRL IRLIRL IRL IRL

IRLIRLIRLIRL

IRLIRLISR ISR ISRISR ISRISRISR

ISRISRISR

ISRISRISRISRISR

ISRISRISR ISR ISRISRISRISR ISRISRISRISR

ISRISR ISRISRISR ISRISRISRISR ISRISRISR

ISRISRISRISR ISR

ISR ISRISR

ISR ISR ISRISRISR

ISRISRISR

ISRISR

ISR

ISRISRISRISRISRISRISR

ISR ISR ISRISRISRISR ISR

ISRISRISR

ISRISRISRISR ISR ISR

ISRISR ISRISRITA

ITA

ITAITAITA

ITA

ITAITAITA

ITAITAITA

ITA

ITA

ITA

ITA

ITA

ITA

ITAITAITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITA

ITAITAITA

ITAITA ITA

ITAITAITA

ITAITA

ITAITAITA

ITA

ITA

ITAITAITA

ITA ITA ITAITA

ITAITA

ITAITA

ITAITAITA

ITAITA ITA

ITA

ITAITAITA

ITAITA ITA

ITAITA

ITA ITAITA ITAITA

ITAITAITA

ITAITA

ITAJPNJPNJPN JPNJPNJPN JPNJPN JPN

JPNJPNJPN JPN

JPNJPN JPNJPN

JPNJPN JPN

JPNJPN JPNJPN

JPN JPNJPN

JPNJPNJPNJPNJPNJPN JPNJPNJPN JPN JPNJPNJPNJPNJPNJPN JPNJPN JPNJPNJPN

JPNJPN JPNJPN JPNJPNJPN JPN

JPNJPNJPN JPN JPNJPNJPN JPN

JPNJPNJPN

JPNJPN JPN JPNJPNJPNJPNJPNJPNJPNJPNJPNJPN

JPN JPNJPNJPNJPNJPN KOR KORKORKORKOR KOR KORKORKOR KORKORKOR KORKOR

KORKORKORKORKORKOR KORKOR KORKORKOR KORKORKORKORKORKOR KOR KORKOR KORKORKOR KOR

KORKORKORKOR KOR KOR KOR

KOR KORKORKORKOR KORKOR KORKORKORKORKOR KOR

KOR KOR KORKORKOR KOR KORKOR

KOR KORKORKORKORKORKOR KOR KOR

KORKORKOR

KOR KORKOR

KORKOR KORKOR KOR KORKOR

MEXMEXMEX

MEXMEXMEXMEXMEX MEXMEX

MEX

MEXMEXMEX

MEX

MEX

MEXMEX

MEXMEX

MEXMEXMEX

MEXMEXMEX

MEX

MEX

MEXMEXMEX

MEXMEXMEX MEXMEXMEX

MEXMEXMEX

MEXMEX

MEX

MEXMEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX

MEX

MEX

MEXMEXMEX

MEXMEX MEXMEXMEX

MEXMEXMEX MEXMEX MEX

MEXMEX

MEXMEX

MYSMYS

MYSMYS

MYSMYSMYS

MYS MYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYSMYSMYSMYS

MYS

MYS

MYSMYSMYSMYSMYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYSMYSMYS

MYS

MYS

MYSMYS

MYS

MYS

MYSMYS

MYSMYSMYS

MYSMYSMYSMYS

MYS

MYSMYSMYSMYS

MYSMYSMYS MYSMYS

MYSMYS MYSMYSMYSMYSMYSMYSMYSMYS

MYS

MYSMYSMYS MYSMYS MYS

MYSMYS

MYS MYSMYS

MYS

MYSMYSMYS

MYSNORNOR NORNOR

NOR

NORNOR NOR

NORNOR

NORNORNORNOR

NOR

NOR

NORNOR

NORNOR

NORNORNOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NORNORNOR

NORNORNORNOR

NOR

NOR

NOR

NOR

NOR

NORNORNOR NORNORNOR NOR

NORNOR

NORNORNOR

NOR

NORNORNORNORNORNORNORNORNOR

NORNORNORNORNORNOR NOR NORNORNORNORNORNOR

NORNOR

NORNORNOR

NORNOR

NZL

NZL

NZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZLNZL

NZLNZLNZL

NZL

NZLNZLNZL

NZLNZLNZL

NZL

PAKPAK PAKPAK PAK PAK

PAKPAK PAK PAKPAKPAKPAK

PAKPAKPAK PAK PAK

PAK PAKPAKPAKPAK PAKPAK PAKPAKPAK

PAKPAK PAKPAKPAK

PAKPAK

PAKPAK PAKPAKPAK PAK

PAK PAKPAK

PAK PAKPAK

PAKPAKPAK PAKPAK

PAK

PAKPAK

PAKPAK PAKPAKPAK PAK PAK PAKPAK PAK PAKPAKPAK

PAKPAKPAKPAKPAKPAKPAK

PAKPAK

PAKPAKPAK PAKPAKPAK PAKPERPER PER PERPERPER PERPER PERPERPERPER PERPER PERPER PERPERPER PER PERPERPER PERPER PERPER PERPERPER PERPERPERPERPER PERPER PERPER PER PERPER PERPER PER PERPERPER PERPER PERPERPERPERPER PER PERPERPER PERPER PER PERPERPER PERPERPER PER PERPERPERPER PERPER PERPERPERPER PERPER PERPHLPHLPHL PHLPHLPHLPHL

PHLPHL PHL PHLPHL PHL PHLPHLPHL PHLPHLPHL PHLPHL

PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHL PHLPHLPHLPHLPHL PHL PHL

PHLPHLPHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL

PHLPHLPHLPHL PHLPHL PHLPHL

PHLPHL PHLPHLPHL PHL PRTPRTPRT PRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRTPRTPRT PRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRTPRTPRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT RUSRUSRUSRUS RUSRUSRUS

RUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUSRUSRUS RUS

RUS RUS RUSRUS RUSRUS RUSRUS RUSRUS

RUSRUSRUS RUS RUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUS

RUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUS RUSRUS RUS RUSRUSRUS

RUS RUSRUSRUS RUSRUS

RUS RUSRUSRUSSWE

SWE SWESWESWE SWE

SWESWESWE SWESWESWESWESWESWESWE

SWESWESWE SWESWESWESWESWESWESWE SWE SWESWE SWESWESWE SWESWE SWESWESWE

SWESWESWE SWESWESWESWE

SWESWESWE SWESWESWE SWESWE

SWESWESWESWE SWE SWESWESWE SWESWESWESWE

SWESWESWESWE

SWESWESWESWESWE SWESWESWE

SWESWE

SWE SWESWE

SWESWE

SWETUR

TURTUR

TURTURTUR

TURTUR

TUR

TUR

TUR TURTURTURTUR

TURTUR

TURTUR

TUR

TURTURTUR

TUR TUR

TURTURTUR

TURTUR

TURTUR

TURTURTUR

TUR

TURTURTURTUR

TURTUR TURTURTUR

TUR

TURTURTURTURTUR

TURTUR

TUR

TURTUR

TURTURTURTUR

TUR TURTURTURTURTUR

TURTUR

TURTUR

TURTUR

TURTURTUR

TURTURTUR

TURUSA

USAUSA

USAUSA

USA USAUSAUSA

USA USAUSAUSAUSA

USAUSA USAUSA

USAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSAUSAUSA

USAUSAUSAUSAUSAUSA

USAUSAUSAUSAUSA

USAUSAUSAUSA USAUSAUSAUSA

USAUSA

USAUSAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USA

USAUSAUSA

USAUSAUSA USA USAUSAUSA USA

USA USA USAUSAUSAUSAUSA USAUSAUSAVEN

VENVEN

VENVEN

VEN

VEN

VENVEN

VEN

VENVEN

VENVENVEN

VEN

VEN

VENVEN

VENVEN

VENVEN

VEN

VENVEN

VENVENVEN

VENVEN

VENVEN

VEN

VENVENVEN

VENVENVENVEN

VENVEN

VENVEN

VEN

VEN

VENVEN

VENVEN

VENVEN

VENVENVENVENVEN

VENVENVEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VEN

VEN

VENVENVEN

VEN

VEN

VEN

VEN

VEN

VEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VEN

ZAF

ZAFZAFZAF

ZAFZAFZAF

ZAFZAF ZAFZAF ZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF ZAFZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAF

ZAF

ZAFZAFZAFZAF

ZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAFZAF

ZAFZAF

ZAF

ZAFZAF ZAF

ZAFZAF

ZAFZAFZAF

ZAFZAFZAFZAF

ZAF

ZAF

ZAF

-4.4

-4.2

-4-3

.8Es

timat

ed e

xcha

nge

rate

ela

stic

ity

-.6 -.4 -.2 0 .2Exchange rate shock

Specification 4: dln approximationExchange rate shock vs. magnitude of exchange rate bias

(c) Log-approximation

ARGARG ARGARGARG ARGARG ARGARGARGARG ARGARGARGARGARGARG ARGARGARG ARGARGARGARGARGARGARGARG ARGARGARGARGARGARGARG ARGARG ARGARG ARGARG ARGARGARG ARG ARGARGARG ARGARG ARG ARGARGARGARGARGARG ARGARGARG ARG ARGARGARG ARGARGARG ARGARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARG

AUSAUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUT AUT AUTAUTAUTAUTAUTAUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUT AUTAUT AUTAUT AUTAUT AUT AUTAUTAUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUT AUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUTBELBEL

BELBEL

BELBELBELBEL

BELBEL

BELBELBELBEL

BEL

BEL

BELBEL

BELBEL BELBELBELBELBEL

BELBELBELBEL

BELBEL

BELBELBEL BEL

BELBEL

BEL

BELBEL

BELBEL

BELBEL

BELBEL BEL

BEL

BELBELBELBELBEL

BELBELBEL

BEL BELBEL BEL

BEL BELBEL

BELBEL

BELBELBEL

BELBEL BELBELBELBELBELBEL

BEL BELBEL

BELBEL

BELBELBEL

BELBELBELBRA BRA BRABRABRA BRABRA BRABRABRABRA BRABRA

BRABRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRABRA BRABRA BRA BRABRA BRABRA BRABRA BRA BRABRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRA BRABRA BRABRABRABRA BRABRA BRABRA BRABRABRACANCAN CANCAN

CANCAN CAN CAN CANCANCANCANCANCANCANCANCAN

CANCANCAN

CANCANCANCAN CAN

CAN CANCAN CANCANCANCANCANCANCANCAN CANCANCANCAN

CANCANCANCANCAN

CANCANCANCANCANCANCAN CANCANCAN

CANCANCAN

CANCANCAN CAN CANCANCANCAN CAN

CANCANCANCAN

CAN

CANCANCANCAN CAN

CANCAN CANCANCHECHECHECHECHECHECHECHECHE CHECHECHE CHECHE CHE CHECHECHECHECHECHECHE CHECHE CHECHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHECHE CHECHECHECHECHECHE CHECHE CHECHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHE CHECHE CHECHE CHECHECHECHE CHECHE CHECHECHE CHECHE CHECHECHE CHECHECHE CHECHE CHECHLCHLCHLCHLCHL CHLCHLCHLCHLCHL CHL CHLCHLCHLCHLCHL CHL

CHLCHLCHLCHL CHLCHLCHL CHLCHLCHL CHL

CHLCHLCHLCHLCHLCHLCHLCHL CHLCHLCHLCHLCHLCHL CHL

CHL CHLCHLCHL CHLCHLCHLCHLCHL CHLCHL CHLCHL CHLCHL

CHLCHL CHLCHLCHLCHLCHL

CHL CHLCHLCHL CHL

CHLCHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHL

CHL CHLCHL

CHLCHLCHLCHLCHNCHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHNCHN

CHNCHN CHN

CHN

CHNCHN CHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHN

CHNCHN CHNCHNCHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHN CHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHNCOLCOLCOL COLCOL COLCOLCOLCOL COL COLCOLCOL COL COLCOLCOLCOLCOLCOL COL COLCOLCOL COLCOL COLCOL COLCOL COLCOLCOL COLCOL

COLCOLCOLCOLCOLCOL COLCOL COLCOLCOL COLCOL COLCOL COLCOLCOLCOL COLCOL COLCOL COLCOL COLCOLCOLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOL COLDEUDEU DEUDEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEUDEUDEUDEU DEU DEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEU DEUDEU DEUDEUDEU DEUDEU DEUDEUDEU DEUDEUDEUDEUDEU DEUDEUDEU DEUDEUDEU DEUDEUDEU DEU DEUDEU DEUDEU DEUDEUDEUDEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEUDEUDEUDEUDEU DEUDEUDEU DEUDEU DEUDEUDEU

DNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNK DNKDNK DNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNK DNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNK DNKDNKDNKDNK DNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNKDZADZADZA DZADZADZADZADZADZA DZADZADZA DZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZA DZA DZA DZADZADZA DZADZA DZADZADZA DZADZADZA DZA DZADZA DZA DZADZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZA DZADZADZA DZADZADZA DZADZADZADZA DZADZADZA DZADZA DZADZADZA DZAEGY EGYEGYEGYEGY EGY EGYEGYEGY EGYEGYEGYEGYEGY EGYEGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGY EGY EGYEGY EGYEGY EGYEGY EGY EGYEGYEGYEGYEGYEGY EGYEGYEGYEGY EGYEGYEGYEGY EGYEGY EGYEGYEGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGY EGYEGY EGYEGY EGYEGYEGY EGYEGYEGYEGYEGY EGY EGYEGYEGY ESPESPESPESP ESPESPESPESP ESPESPESPESP ESPESP ESPESP ESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESPESPESPESPESP ESPESPESPESPESPESP ESP ESPESPESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESP ESPESPESPESP ESP ESPESPESPESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESPESPESPESPESP ESPESPESPESPESPESP ESP FINFINFIN FINFINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFINFIN FIN FINFINFIN FINFINFIN FINFIN FINFIN FINFIN FINFINFIN FINFIN FIN FINFIN FINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFINFIN FINFINFINFIN FINFINFIN FINFRA FRAFRAFRAFRAFRAFRAFRA

FRAFRA FRAFRAFRAFRAFRA FRAFRA FRAFRA

FRAFRAFRA

FRAFRA

FRA FRAFRAFRAFRA FRAFRA

FRAFRAFRA FRAFRA FRAFRAFRA FRA

FRAFRA

FRAFRA FRAFRA FRA

FRA FRAFRA FRAFRAFRAFRAFRAFRA FRAFRAFRAFRA FRA FRAFRA FRA

FRAFRAFRAFRAFRA FRA FRAFRAFRAFRAFRA

FRAFRAFRAFRAFRA

FRAFRAFRA

FRA

FRA FRAFRAFRAFRAFRA FRAFRAFRAFRA FRAGBR GBRGBR GBRGBR GBRGBR GBRGBRGBR GBR GBRGBR GBRGBR GBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBRGBRGBRGBR GBRGBRGBRGBR GBR GBRGBRGBR GBRGBR GBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBRGBRGBR GBRGBRGBR GBR GBR GBRGBRGBRGBRGBR GBRGBRGBRGBR GBRGBR GBRGBR GBRGBRGBR GBRGBR GBRGBR GBR GBRGBRGBRGBRGBRGBR GBRGBRGBR GBRGRC GRCGRCGRCGRCGRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCIND IND INDINDINDINDINDINDIND INDIND INDINDINDIND INDINDINDIND INDINDIND INDINDIND IND INDINDIND INDINDINDIND INDINDIND IND INDINDIND INDINDIND INDINDIND INDIND IND INDIND INDIND INDIND INDINDIND IND INDINDINDIND IND INDIND INDIND INDINDIND INDINDIND INDINDINDIND INDIND INDINDIND INDIND IRL IRLIRLIRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRL IRLIRLIRL IRL IRLIRL IRLIRL IRLIRLIRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRLIRLIRLIRL IRL IRL IRLIRLIRLIRL IRLIRL IRL IRLIRL IRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRLISR ISR ISRISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISRISR ISRISRISRISRISR ISR ISRISRISR ISRISRISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISRISR ISRISRISR ISRISR ISR ISR ISRISRISR ISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISR

ITAITA ITAITAITAITA ITAITAITA ITAITAITAITA ITAITA ITA

ITAITA

ITAITA ITAITAITAITAITA ITA ITAITA

ITAITAITAITAITA ITAITA ITAITAITA ITAITAITA ITAITAITA ITAITA ITAITAITA ITA ITAITAITAITA ITA ITAITA ITAITAITA ITAITAITAITA

ITAITAITA ITAITA ITAITAITA ITA ITAITAITAITA ITAITAITA ITA ITAITA

JPNJPN JPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPNJPN JPN JPNJPNJPN JPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPN JPNJPNJPNJPNJPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPNJPNJPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPNJPNJPNJPNJPNJPN KOR KORKORKORKOR KOR KORKORKOR KORKORKOR KORKOR KORKORKORKORKORKOR KORKOR KORKORKOR KORKORKOR KORKORKOR KORKORKOR KORKORKOR KORKOR KORKORKOR KORKORKORKOR KORKOR KORKOR KORKOR KORKORKORKORKOR KORKOR KOR KORKORKOR KOR KORKOR KOR KORKORKOR KORKORKOR KOR KORKORKOR KORKOR KORKOR KORKOR KORKOR KOR KORKORMEX MEXMEX MEXMEXMEXMEXMEX MEXMEX MEX

MEX MEXMEXMEX

MEXMEX

MEXMEXMEXMEXMEXMEX MEXMEXMEX MEX

MEXMEXMEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEXMEX MEX

MEXMEXMEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX MEX

MEXMEXMEXMEX MEXMEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEX MEXMYS MYS

MYSMYSMYS MYSMYS MYS MYSMYS

MYS MYSMYSMYS MYSMYSMYSMYS MYSMYSMYS MYS

MYSMYSMYSMYSMYSMYSMYS MYSMYS MYSMYS

MYS MYSMYS MYSMYSMYS MYSMYS

MYSMYSMYS

MYSMYSMYS MYSMYSMYS MYSMYSMYSMYSMYS

MYSMYSMYSMYSMYSMYSMYS MYSMYSMYSMYSMYS

MYSMYSMYSMYSMYSMYSMYSMYS

MYSMYSMYS MYSMYS MYSMYS MYS MYSMYSMYS

MYSMYS MYSMYS MYSNORNORNORNOR NORNOR NOR NORNORNOR NORNORNORNOR NORNOR NOR NORNOR NOR NORNORNOR NORNOR

NORNOR NORNORNOR NORNOR NORNORNOR NORNORNOR NOR

NORNORNOR NORNORNORNORNORNORNOR NORNORNORNORNOR NOR NORNORNORNORNORNORNORNORNOR NORNORNORNORNORNOR NOR NORNORNORNORNORNOR NORNORNORNOR NOR NORNOR

NZLNZL

NZL

NZLNZLNZLNZL

NZLNZL

NZL

NZLNZLNZLNZLNZL

NZL

NZL

NZLNZLNZLNZL

NZLNZLNZL

NZLNZL

NZLNZLNZLNZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZLNZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZLNZL

NZLNZLNZLNZL

NZLNZLNZL

NZLNZL

NZLNZLNZL

NZL

NZLNZL NZL NZLNZLNZL

NZLPAKPAK PAKPAK PAK PAKPAK PAK PAK PAKPAKPAKPAKPAK PAKPAK PAK PAKPAK PAKPAKPAKPAK PAKPAK PAK PAKPAKPAK PAK PAKPAKPAK PAKPAK PAKPAKPAKPAKPAK PAKPAK PAKPAK PAK PAKPAK PAKPAKPAK PAKPAKPAK PAKPAK PAKPAK PAKPAKPAK PAK PAK PAKPAK PAK PAKPAKPAK PAKPAKPAKPAKPAKPAKPAK PAKPAK PAKPAKPAK PAKPAKPAK PAKPERPER PERPERPERPER PERPER PERPERPERPER PERPER PERPER PERPERPER PER PERPERPER PERPER PERPER PERPERPER PERPERPERPERPER PERPERPERPER PER PERPER PERPER PER PERPERPER PERPER PERPERPERPERPER PER PERPERPER PERPER PER PERPERPER PERPERPERPERPERPERPERPER PERPER PERPERPERPER PERPER PERPHLPHLPHL PHLPHLPHLPHL PHLPHL PHL PHLPHL PHL PHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHL PHLPHL PHLPHLPHL PHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHL PHL PHLPHLPHL PHL PRTPRT

PRTPRT

PRTPRTPRTPRTPRTPRTPRTPRTPRT

PRTPRTPRT PRT

PRT PRTPRT

PRTPRTPRTPRTPRTPRT

PRTPRTPRTPRT PRTPRT

PRT PRTPRTPRT PRTPRTPRT PRTPRT

PRTPRTPRTPRTPRTPRTPRTPRTPRT

PRTPRTPRT PRTPRTPRT

PRTPRTPRTPRTPRT

PRT

PRTPRT PRT

PRTPRTPRT PRTPRT

PRTPRTPRT PRTPRT

PRTPRT

PRTPRT RUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUSRUS RUS RUSRUS RUSRUS RUSRUS RUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUS RUSRUSRUSRUS RUS RUSRUS RUSRUS RUS RUSRUSRUSSWESWE SWESWE SWE SWESWESWESWE SWESWESWESWESWESWESWE SWESWESWE SWESWESWESWESWESWESWE SWE SWESWE SWESWESWE SWESWE SWESWESWESWE SWESWE SWESWESWESWE SWESWESWE SWESWESWE SWESWE SWESWESWESWE SWESWESWESWE SWESWESWE SWESWE SWESWESWE SWESWE SWESWESWE SWESWESWE SWESWE SWE SWESWE SWESWE SWE

TURTUR

TUR TURTURTUR TURTUR TUR

TURTURTUR TURTURTURTURTUR

TURTURTUR

TURTURTUR TUR TURTURTURTUR

TURTUR TUR TURTURTURTUR TURTURTURTURTUR

TURTUR TURTURTURTUR

TURTURTUR TURTURTURTUR

TUR

TURTURTURTURTURTUR TUR TURTURTURTURTUR TUR TUR

TUR TURTUR TURTUR TURTUR

TURTURTURTUR

USA USAUSA USAUSAUSAUSAUSA USAUSA USAUSAUSA USA USAUSA USAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSA USAUSAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USA USAUSAUSA USAUSAUSA USA USAUSAUSA USAUSA USA USAUSAUSAUSAUSA USAUSAUSAVEN

VENVEN

VENVEN

VEN

VEN

VENVEN

VEN

VENVEN

VENVENVENVEN

VEN

VENVEN

VENVEN

VENVEN

VEN

VENVEN

VENVENVEN VENVEN

VENVEN

VEN

VENVENVEN

VENVENVENVEN

VENVENVEN

VENVEN

VEN

VENVEN VEN

VENVEN

VENVEN

VENVENVENVENVENVENVEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VEN

VEN

VENVENVEN

VEN

VENVEN

VEN

VEN

VEN

VEN

VENVEN

VEN

VEN

VENVENVEN

VEN

VENZAF

ZAFZAFZAFZAF ZAFZAF

ZAFZAFZAFZAF ZAFZAF

ZAF ZAFZAF

ZAFZAF ZAFZAFZAF

ZAF ZAFZAFZAFZAFZAF

ZAF ZAFZAF

ZAFZAF

ZAFZAF

ZAFZAF ZAFZAFZAF

ZAFZAFZAF

ZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAFZAFZAF

ZAFZAFZAF

ZAFZAFZAFZAF ZAF

ZAFZAFZAF

ZAFZAF ZAF

ZAFZAF

ZAFZAFZAFZAF

ZAFZAFZAFZAF

ZAF

ZAF

-4.4

-4.2

-4-3

.8Es

timat

ed e

xcha

nge

rate

ela

stic

ity

-.5 0 .5Exchange rate shock

Specification 5: Alternative weightsExchange rate shock vs. magnitude of exchange rate bias

(d) Alternative weights

Figure 2: GETI: Relationship between exchange rate shock and the bias in the exchange rate elasticity.

19

ARGARG ARGARGARG ARGARG ARGARGARGARG ARGARGARGARGARGARG ARG ARGARG ARGARGARGARGARG ARGARGARG ARGARGARGARGARGARGARG ARGARG ARGARG ARGARG ARGARGARG ARG ARGARGARG ARGARG ARG ARGARGARGARGARGARG ARGARGARG ARG ARGARGARG ARGARGARG ARGARG ARGARG ARGARGARGARG ARG ARGARGARG ARGARGAUSAUS AUSAUSAUSAUSAUS AUS AUSAUS AUSAUS AUSAUS AUSAUSAUS AUSAUS AUSAUS AUSAUS AUSAUS AUSAUSAUSAUS AUSAUS AUS AUSAUSAUSAUS AUSAUSAUS AUS AUSAUS AUSAUS AUSAUSAUSAUS AUSAUSAUS AUS AUSAUSAUS AUS AUSAUSAUSAUS AUSAUS AUS AUSAUSAUS AUS AUSAUSAUS AUSAUS AUS AUSAUS AUSAUSAUS AUSAUSAUSAUS AUS AUSAUSAUS AUSAUT AUT AUTAUT AUTAUTAUTAUTAUT

AUTAUT AUTAUTAUTAUTAUT AUTAUTAUT AUTAUTAUTAUTAUTAUT AUTAUT AUTAUTAUTAUT AUTAUT AUTAUT AUTAUT AUT AUTAUTAUTAUT AUTAUTAUTAUT AUT AUTAUTAUT AUTAUT AUT AUTAUTAUTAUTAUT AUTAUT AUTAUT AUTAUTAUTAUTAUT AUTAUTAUTAUT AUTAUTAUT AUTAUT AUTAUTAUT AUTAUT AUTAUT AUT

BELBEL BELBEL BELBELBEL BELBEL BELBELBEL BELBELBELBEL BEL BELBELBEL BELBELBEL BELBELBEL BELBELBELBELBEL BELBELBEL BELBELBEL BELBEL BELBEL BELBEL BELBEL BEL BELBEL BELBELBEL BELBELBEL BEL BELBEL BEL BEL BELBEL BELBEL BELBEL BEL BELBEL BELBEL BELBELBELBELBELBEL BEL BELBEL BELBEL BELBELBEL BEL BELBELBRA BRA BRABRABRA BRABRA BRABRABRABRA BRABRABRA BRABRABRA BRABRA BRABRA BRABRABRA BRABRABRABRA BRABRABRA BRA BRABRA BRABRABRA BRABRABRABRA BRABRABRABRABRABRA BRABRA BRA BRABRA BRABRA BRABRA BRA BRABRABRA BRABRABRABRA BRABRA BRABRABRA BRABRA BRA BRABRA BRABRABRABRA BRABRA BRABRA BRABRABRACANCAN CANCANCANCAN CAN CAN CANCANCANCANCANCANCANCAN CANCAN CANCANCAN CANCANCAN CANCAN CANCAN CANCANCANCANCAN CANCANCAN CANCANCANCANCAN CANCANCANCAN CANCANCANCAN CANCANCAN CANCANCAN CANCANCAN CANCANCAN CAN CANCANCANCAN CANCAN CANCANCAN CANCAN CANCANCAN CANCAN CAN CANCAN

CHECHECHECHECHECHECHECHECHE CHECHECHE CHECHE CHE CHECHECHECHECHECHECHE CHECHE CHECHECHE CHECHE CHECHE CHECHECHECHE CHE CHECHECHECHE CHE CHECHECHECHECHE CHECHE CHECHECHECHE CHECHE CHECHECHECHECHE CHECHECHECHE CHE CHECHE CHECHE CHECHECHECHE CHECHE CHECHECHE CHECHE CHECHECHE CHECHECHE CHECHE CHE

CHLCHLCHL CHLCHL CHLCHLCHLCHLCHL CHL CHLCHLCHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHLCHLCHL CHL CHLCHLCHLCHLCHL CHLCHL CHLCHLCHL CHLCHLCHL CHLCHL CHLCHL CHLCHL CHLCHLCHLCHL CHL CHLCHLCHLCHL CHL CHLCHLCHL CHLCHL CHL CHLCHLCHL CHLCHL CHLCHLCHLCHLCHLCHL CHL CHLCHL CHLCHLCHLCHL

CHNCHN CHN CHNCHN CHNCHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHNCHN CHN CHNCHNCHN CHNCHNCHN CHNCHN CHNCHNCHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN CHNCHNCHNCHN CHN CHN CHNCHNCHN CHNCHN CHNCHNCHNCHN CHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHNCHN CHN CHNCHNCHN CHNCHNCHNCHNCHN CHNCHN

COLCOLCOL COLCOL COLCOLCOLCOL COL COLCOLCOL COL COLCOLCOLCOL COLCOL COL COLCOLCOL COLCOL COLCOL COLCOL COLCOL COL COLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOLCOL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOL COLCOLCOLCOLCOLCOL COLCOLCOLCOLCOL COLCOL COLCOL COLCOL COL

DEUDEU DEUDEUDEUDEUDEUDEU DEUDEUDEUDEUDEUDEUDEUDEUDEUDEU DEU DEU

DEU DEU DEUDEU DEU DEUDEUDEU DEUDEU DEU DEUDEU

DEUDEUDEU DEUDEU

DEUDEUDEU DEUDEU DEUDEU

DEUDEU

DEUDEU DEUDEUDEUDEUDEUDEU DEUDEU

DEU DEUDEU DEUDEUDEUDEU DEU DEUDEU DEU

DEUDEUDEU DEUDEU DEUDEUDEUDEUDEU

DEUDEUDEU DEUDEU DEUDEUDEU

DNKDNK DNK DNKDNKDNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNK DNKDNK DNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNK DNK DNKDNK DNKDNKDNK DNK DNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNK DNKDNKDNKDNK DNKDNK DNK DNKDNKDNK DNKDNKDNKDNKDNKDNK DNKDNK DNKDNKDNK DNKDNKDNKDNKDNK DNKDNK DNKDNK DNKDZADZADZA DZADZADZADZADZADZA DZADZADZA DZADZA DZA DZADZADZA DZADZADZA DZADZA DZADZADZADZA DZA DZA DZADZADZA DZADZA DZADZADZA DZADZADZA DZA DZADZA DZA DZADZADZADZADZA DZA DZADZADZA DZADZADZADZA DZADZA DZADZADZA DZADZADZA DZADZA DZADZA DZADZADZA DZADZA DZADZADZA DZA

EGY

EGYEGYEGY

EGYEGY

EGYEGY

EGYEGYEGYEGYEGY

EGYEGY

EGY EGYEGYEGYEGY

EGY

EGYEGY EGYEGY

EGY EGY EGY

EGYEGY

EGYEGY

EGYEGY

EGYEGY

EGY EGY EGYEGYEGYEGY

EGYEGY

EGYEGY

EGYEGYEGY

EGYEGY EGYEGY

EGYEGYEGY

EGY

EGY

EGYEGY

EGYEGY

EGY

EGY

EGYEGY

EGYEGYEGY

EGYEGY

EGYEGY

EGY

EGYEGY

EGYEGYEGY

EGYEGYEGYEGY EGY EGY

EGY

EGYEGY

ESPESPESPESP ESPESPESPESP ESPESPESPESP ESPESP ESPESP ESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESPESPESPESPESP ESPESPESPESPESPESP ESP ESPESPESPESPESPESP ESPESP ESP ESPESPESP ESPESPESP ESPESP ESPESPESPESP ESP ESPESPESPESPESP ESP ESPESPESP ESPESP ESPESPESP ESPESPESPESPESPESPESPESP ESPESPESPESP ESPESP ESPFINFINFIN FINFINFINFIN FIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFIN FINFINFIN FIN FINFINFIN FINFINFIN FINFIN FINFIN FINFIN FINFINFIN FINFIN FIN FIN FIN FINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFIN FINFINFINFINFIN FINFINFIN FIN FINFINFINFIN FINFINFINFIN FINFINFINFIN FINFINFIN FIN

FRA FRAFRAFRAFRAFRAFRA FRAFRA FRA FRAFRA FRAFRAFRA FRAFRA FRAFRAFRAFRAFRAFRA

FRAFRA FRAFRAFRAFRA FRA

FRAFRAFRAFRA FRAFRA FRAFRAFRA FRA

FRAFRA

FRA FRA FRAFRAFRA

FRA FRAFRA FRAFRAFRAFRAFRAFRA FRAFRAFRAFRA FRA FRAFRA FRA

FRA FRAFRAFRA FRA FRA FRAFRAFRAFRAFRAFRAFRAFRAFRAFRA

FRAFRAFRAFRA

FRA FRAFRAFRAFRA FRA FRAFRAFRAFRA FRAGBR GBR

GBRGBR

GBRGBRGBR GBR

GBRGBR GBRGBR

GBR GBRGBR GBRGBRGBR GBRGBRGBRGBRGBR

GBRGBR GBRGBRGBRGBR GBRGBRGBRGBR GBR GBR GBR

GBR GBRGBR GBRGBRGBRGBR

GBRGBRGBRGBRGBRGBRGBRGBRGBRGBR

GBRGBRGBR GBR

GBRGBRGBRGBRGBR

GBRGBRGBR

GBRGBRGBRGBR GBR

GBRGBR GBRGBR

GBRGBR

GBRGBR

GBR GBRGBRGBRGBRGBRGBR GBRGBRGBR

GBR

GRC GRCGRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRC GRCGRCGRC GRCGRC GRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRCGRC GRCGRC GRCGRC GRCGRC GRCGRC GRCGRCGRCGRC GRCGRC GRCGRC GRCGRCGRCGRCGRC GRCGRC GRCGRCGRC GRCGRCGRCGRCGRCGRC

IND INDINDINDINDINDIND

INDINDINDIND

INDINDINDIND INDINDINDIND

IND

INDIND

INDIND

IND INDIND

INDIND

INDIND INDIND

INDINDIND

IND INDINDIND

INDINDIND

INDINDINDIND

IND IND INDIND

INDIND

INDIND

INDINDIND

INDINDINDIND

INDIND

IND

IND

IND

IND

INDINDIND

INDINDIND

INDINDINDIND

INDINDIND

INDINDINDIND

IRL IRLIRLIRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRLIRL IRLIRLIRLIRL IRLIRL IRLIRLIRLIRL IRL IRLIRL IRLIRL IRLIRLIRL IRLIRL IRL IRLIRL

IRLIRL IRLIRL IRLIRLIRLIRL IRL IRL IRLIRLIRLIRL IRLIRL IRL IRL

IRL IRL IRLIRL IRLIRL IRLIRL IRL IRLIRL IRLIRLIRL IRLIRL IRLIRL IRLIRL IRLIRL IRL IRL

IRLIRLIRL

IRLIRLIRL

ISR ISR ISRISR ISRISRISR ISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISRISRISR ISRISRISRISRISR ISR ISRISRISR ISRISRISRISR ISRISRISRISR ISRISRISR ISRISR ISR ISRISR ISR ISRISR ISRISRISRISR ISRISRISR ISRISRISR ISRISRISR ISRISR ISR ISR ISRISRISR ISRISR ISRISRISR ISRISRISR ISR ISRISRISR ISR ISR

ITAITA

ITAITAITAITA

ITAITAITAITAITAITA

ITAITA

ITA ITAITA

ITAITAITA ITAITAITAITAITA

ITA ITAITA

ITAITA

ITAITAITA ITAITA ITAITAITA ITAITAITA

ITAITAITA ITAITAITAITAITA ITA ITA ITAITAITA ITA ITA

ITA ITAITAITA ITAITA ITAITAITAITAITA ITAITA ITA

ITAITAITA ITAITA ITAITA ITAITAITA ITA ITAITAJPNJPN JPN JPNJPNJPN JPNJPN JPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPN JPNJPNJPN JPN JPNJPNJPNJPNJPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPNJPNJPN JPNJPN JPNJPN JPN JPNJPNJPN JPNJPNJPN JPNJPNJPN JPN JPNJPN JPNJPNJPNJPNJPNJPNJPNJPN JPN JPNJPNJPNJPNJPN

KOR KORKORKORKOR KOR KORKORKOR KORKORKOR KORKOR KORKORKORKORKORKOR KORKOR KORKORKOR KORKORKOR KORKORKOR KOR KORKOR KORKORKOR KORKOR KORKORKOR KOR KOR KORKOR KORKOR KORKOR KORKOR KORKORKORKORKOR KORKOR KOR KORKORKOR KOR KORKOR KOR KORKORKOR KORKORKOR KOR KORKORKOR KORKOR KORKOR KORKOR KORKOR KOR KORKOR

MEX MEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEX MEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEX MEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEXMEX MEXMEXMEXMEX MEXMEX MEXMEX MEXMEXMEX MEX MEX

MYS MYSMYSMYS MYS MYSMYS MYS MYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYSMYSMYSMYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYSMYS MYSMYS MYSMYS MYSMYS MYSMYS MYSMYSMYS MYSMYSMYSMYSMYS MYSMYSMYSMYS MYSMYSMYS MYSMYSMYSMYS MYS MYSMYSMYSMYSMYSMYSMYSMYS MYSMYSMYS MYSMYS MYSMYS MYS MYS MYSMYS MYSMYS MYSMYS MYSNORNOR NORNOR NORNOR NOR NORNORNOR NORNORNORNOR NORNOR NOR NORNOR NOR NORNORNOR NORNOR NORNOR NORNORNOR NORNOR NORNORNOR NORNORNOR NORNOR NORNOR NORNORNOR NORNORNOR NOR NORNORNORNORNOR NOR NORNORNORNORNORNORNORNORNOR NORNORNORNORNORNOR NOR NORNORNORNORNORNOR NORNORNORNOR NOR NORNORNZL NZLNZL NZLNZLNZLNZL NZLNZLNZL NZLNZLNZLNZLNZLNZL NZLNZLNZL NZLNZLNZL NZL NZLNZL NZL NZLNZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZL NZLNZL NZLNZLNZL NZLNZLNZL NZL NZLNZL NZLNZL NZLNZL NZLNZL NZL NZLNZL NZLNZLNZL NZL NZLNZLNZLNZL NZLNZLNZLNZL NZLNZL NZL NZLNZLNZLNZL

PAKPAK PAKPAK PAK PAK

PAKPAK

PAK PAKPAKPAKPAK

PAKPAKPAK PAK

PAKPAK

PAKPAKPAKPAK PAKPAK PAK

PAKPAKPAK

PAK PAKPAKPAKPAK

PAKPAKPAK PAKPAK

PAKPAK

PAK PAKPAK

PAKPAK

PAKPAKPAKPAK PAKPAK

PAK

PAKPAK

PAKPAK PAKPAKPAK PAK PAK PAKPAK PAK PAKPAKPAK

PAKPAKPAKPAKPAKPAKPAK

PAKPAK

PAKPAKPAK PAKPAKPAK PAK

PERPER PER PERPERPER PERPER PERPERPERPER PERPER PERPER PERPERPER PER PERPERPER PERPER PERPER PERPERPER PERPERPERPERPER PERPER PERPER PER PERPER PERPER PER PERPERPER PERPER PERPERPERPERPER PER PERPERPER PERPER PER PERPERPER PERPERPER PER PERPERPERPER PERPER PERPERPERPER PERPER PERPHLPHLPHL PHLPHLPHLPHL PHLPHL PHL PHLPHL PHL PHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHL PHLPHLPHL PHL PHLPHL PHLPHLPHL PHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHL PHLPHL PHLPHLPHLPHL PHLPHLPHLPHL PHLPHL PHLPHLPHL PHL PHLPHLPHL PHL PRTPRTPRT PRTPRTPRTPRT PRTPRTPRTPRTPRTPRT PRTPRTPRT PRT PRT PRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRT PRTPRTPRT PRTPRTPRT PRTPRT PRTPRTPRTPRTPRTPRTPRTPRTPRT PRTPRTPRT PRTPRTPRT PRTPRTPRTPRT PRTPRT PRTPRT PRTPRT PRTPRT PRTPRTPRT PRTPRT PRTPRTPRT PRT PRTPRT

RUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUSRUS RUS RUSRUS RUSRUS RUSRUS RUSRUSRUS RUSRUS RUS RUSRUSRUSRUS RUS RUSRUSRUS RUSRUSRUSRUSRUSRUSRUSRUS RUSRUSRUS RUSRUSRUSRUS RUSRUSRUSRUSRUS RUSRUS RUSRUSRUS RUSRUS RUSRUS RUS RUSRUSRUSRUS RUS RUSRUS RUSRUS RUS RUSRUSRUS

SWESWE

SWESWE

SWESWE

SWESWESWE

SWESWESWESWESWE

SWESWE

SWESWESWE SWESWESWESWESWESWESWE SWESWESWE SWE

SWESWESWE

SWESWESWESWE

SWESWESWE

SWESWESWESWE

SWESWESWE SWESWESWE SWESWE

SWESWESWESWE SWE SWE

SWESWE SWESWESWESWE

SWESWE

SWESWESWESWE

SWESWESWESWESWE

SWESWE

SWESWE SWE

SWESWE

SWESWE

TURTURTUR TUR TURTUR TURTUR TURTUR TUR TUR TURTURTURTURTUR TURTURTUR TURTURTUR TUR TURTURTURTUR TURTUR TUR TURTURTURTUR TURTURTURTURTUR TURTUR TURTURTURTUR TURTURTUR TURTURTURTURTUR TURTUR TURTURTURTUR TUR TURTURTURTURTUR TUR TURTUR TURTUR TURTUR TURTUR TURTURTUR TURUSA USAUSA USAUSAUSA USAUSA

USAUSA USAUSAUSA USA USAUSA USAUSAUSAUSAUSAUSA USA USAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSAUSA USAUSAUSAUSA USAUSA USAUSAUSAUSAUSAUSA

USA USA USAUSAUSAUSA USA USAUSAUSA USAUSAUSA USA USAUSAUSA USAUSA USA USAUSAUSAUSAUSA USAUSAUSA

VEN VENVENVENVEN VENVEN VENVEN VENVENVEN VENVENVENVEN VENVEN VEN VENVENVENVEN VENVENVEN VENVENVEN VENVENVENVEN VENVEN VENVEN VEN VENVENVENVENVEN VEN VENVENVEN VENVEN VENVEN VENVENVEN VENVENVENVENVENVENVEN VENVEN VENVEN VENVEN VENVENVEN VENVEN VENVENVENVEN VENVEN VENVEN VENVEN VENVEN VENVEN VENVENVENVEN VEN

ZAF ZAFZAFZAFZAF ZAFZAF ZAFZAF ZAFZAF ZAFZAF ZAF ZAFZAF ZAFZAF ZAFZAFZAF ZAF ZAFZAFZAFZAFZAF ZAF ZAFZAFZAF ZAFZAFZAF ZAFZAF ZAFZAFZAFZAF ZAFZAF ZAFZAFZAF ZAFZAF ZAFZAF ZAFZAF ZAFZAF ZAFZAFZAFZAF ZAFZAFZAFZAF ZAFZAFZAF ZAFZAFZAFZAF ZAFZAF ZAFZAF ZAF ZAFZAFZAF ZAFZAFZAFZAF ZAFZAF ZAF

.9.9

51

1.05

1.1

Estim

ated

exc

hang

e ra

te e

last

icity

-.6 -.4 -.2 0 .2Exchange rate shock

Specification 2: Gold medal mistakeExchange rate shock vs. magnitude of demand bias

(a) Gold medal mistake

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARGARG

ARGARGARGARG

ARGARGARG

ARG

ARG

ARGARG

ARGARGARGARG

ARGARG

ARGARGARG

ARGARGARGARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARG

ARGARGARG

ARG

ARG

ARGARG

ARG

ARG

ARGARG

ARGARGARG

ARG

ARG

ARG

ARG

ARGARG

ARGARG

ARG

ARGARG

ARG

ARG

ARGAUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUSAUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUS

AUSAUSAUSAUS

AUSAUS

AUSAUS

AUS

AUSAUS

AUSAUS

AUS

AUSAUS

AUS

AUS

AUSAUSAUSAUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUTAUTAUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUTAUT

AUT

AUT

AUTAUTAUT

AUTAUTAUT

AUT

AUT

AUTAUT

AUTAUTAUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUTAUTAUT

AUTAUT

AUTAUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUTAUT

BELBEL

BEL

BEL

BELBELBEL

BEL

BEL

BEL

BELBEL

BELBEL

BEL

BEL

BEL

BEL

BELBEL

BELBELBEL

BELBEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BELBEL

BEL

BELBEL

BEL

BELBEL

BELBEL

BEL

BELBEL

BELBEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BELBEL

BELBELBEL

BELBEL

BELBEL

BEL

BEL

BEL

BEL

BELBEL

BELBELBEL

BRA

BRABRA

BRABRABRA

BRA

BRA

BRABRABRA

BRA

BRA

BRA

BRA

BRABRA

BRA

BRA

BRA

BRABRABRA

BRA

BRA

BRABRABRABRABRA

BRABRA

BRA

BRA

BRABRA

BRA

BRABRABRABRA

BRABRABRA

BRABRABRA

BRA

BRABRA

BRA

BRABRA

BRA

BRA

BRA

BRABRA

BRABRABRA

BRABRABRA

BRABRABRA

BRABRA

BRABRA BRA BRABRA

BRA

BRABRABRA

BRA

BRA

BRABRA

BRABRABRACAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CANCANCANCANCANCAN

CAN

CAN

CAN

CANCAN

CAN

CANCAN

CAN

CAN

CAN

CAN

CANCANCANCAN

CANCAN

CAN

CANCAN

CANCANCAN

CAN

CAN

CANCAN

CANCAN

CANCAN

CANCAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CAN

CAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CANCAN

CANCANCHECHECHECHECHECHECHECHECHE

CHE

CHECHE

CHE

CHE

CHE

CHECHECHECHECHE

CHE

CHE

CHE

CHECHECHE

CHE

CHE

CHE

CHECHE

CHECHECHE

CHE

CHECHE

CHE

CHECHECHE

CHECHECHECHE

CHE

CHE

CHE

CHECHE

CHECHECHE

CHE

CHECHE

CHECHECHE

CHECHECHE

CHECHE

CHE

CHE

CHE

CHECHECHECHE

CHE

CHECHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHLCHLCHL

CHLCHL

CHL

CHLCHLCHLCHL

CHLCHL

CHLCHLCHL

CHL

CHL

CHL

CHLCHL

CHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHLCHL

CHLCHLCHLCHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHL

CHL

CHLCHLCHL

CHLCHL

CHLCHL

CHLCHLCHLCHL

CHL

CHLCHL

CHL

CHL

CHL

CHL

CHLCHL

CHL

CHL

CHLCHLCHLCHL

CHLCHLCHL

CHL

CHLCHL

CHL

CHL

CHLCHLCHLCHNCHN

CHNCHNCHN

CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHNCHNCHN

CHN

CHNCHNCHN

CHN

CHN

CHN

CHNCHN CHN CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHNCHNCHN CHNCHNCHN

CHN

CHNCHNCHNCHN

CHNCHN

CHNCHNCHNCHN

CHNCHN CHNCHNCHN

CHNCHN

CHN

CHNCHNCHN

CHNCHNCHN CHN CHNCHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHN

CHNCHN CHNCHNCHNCHNCHN

CHNCHN

COLCOL

COLCOL

COL

COL

COLCOL

COL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOLCOL

COLCOL

COLCOLCOL

COL

COL

COL

COLCOL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOL

COL

COL

COL

COL

COLCOL

COL

COL

COL

COL

COL

COL

COLCOL

COLCOL

COL

COL

COL

COL

COLCOLCOLCOL

COLCOL

COLCOL

COLCOLCOL

COL

COLCOL

COL

COL

COL

COLDEU

DEUDEUDEUDEU

DEU

DEUDEUDEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEUDEU

DEU

DEUDEU

DEU DEUDEU

DEUDEUDEU

DEU DEUDEU

DEU

DEU

DEUDEUDEU

DEU

DEUDEU

DEU

DEUDEUDEUDEU

DEU

DEU

DEUDEU DEUDEU

DEU

DEUDEU

DEUDEU

DEU

DEUDEUDEU DEU

DEUDEUDEUDEU DEU

DEUDEU

DEUDEUDEU DEU

DEU

DEUDEUDEUDEUDEU

DEUDEUDEU

DEUDEU

DEUDEUDEU DNK

DNK

DNK

DNK

DNKDNKDNKDNKDNK

DNK

DNKDNKDNK

DNKDNK

DNKDNK

DNKDNK

DNK

DNKDNKDNK

DNKDNK

DNK

DNKDNK

DNK

DNK

DNK

DNK

DNK

DNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNK

DNK

DNK

DNK

DZA

DZA

DZA

DZADZA

DZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZADZA

DZA

DZAEGY

EGYEGY

EGY

EGY

EGY

EGYEGY

EGY

EGYEGYEGYEGY

EGY

EGYEGY

EGYEGY

EGYEGY

EGY

EGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGY

EGYEGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGY

EGYEGYEGY

EGYEGYEGY

EGY

EGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGYEGY

EGY

EGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGYEGY

EGYEGYEGY

EGY

EGY

EGYEGY

ESPESP

ESPESP

ESPESPESPESP

ESPESP

ESPESP

ESP

ESP

ESP

ESP

ESP

ESPESPESP

ESPESP

ESPESP

ESPESP

ESP

ESPESP

ESP

ESPESPESPESPESP

ESPESPESPESPESP

ESPESP

ESP

ESPESP

ESPESP

ESPESPESP

ESPESPESPESP

ESP

ESPESP

ESP

ESP

ESP

ESPESPESPESP

ESP

ESPESPESP

ESP

ESP

ESP

ESPESPESP

ESP

ESPESP

ESP

ESPESPESPESP

ESPESPESP

ESP

ESPESPESPESPESP

ESP

ESP FINFIN

FIN

FINFINFINFIN

FINFIN

FINFINFIN FINFIN

FINFIN

FINFIN

FIN

FINFIN

FIN

FIN

FINFINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFIN

FINFINFIN

FINFINFINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFINFIN

FINFIN

FINFINFINFINFIN

FINFINFINFINFINFIN

FINFINFIN

FIN

FINFINFIN

FIN

FINFINFINFIN

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRA

FRA

FRAFRAFRAFRA

FRAFRA

FRA

FRAFRA

FRA

FRAFRA

FRA

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRAFRA

FRA

FRAFRA

FRAFRA

FRA

FRA

FRA

FRA

FRA

FRAFRA

FRA

FRA

FRA

FRAFRA

FRAFRA

FRA

FRAFRAFRA

FRAFRAFRA

FRAFRA

FRAFRAFRA

FRA

FRAFRAFRAFRAFRA

FRA

FRAFRAFRA

FRA

FRA

FRAFRAFRA

FRA

FRAFRA

FRA

FRA

FRAFRAFRAFRA

FRAFRAFRA

FRAFRAFRA

FRAGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBRGBRGBR

GBR

GBR

GBRGBRGBR

GBR

GBR

GBRGBRGBR

GBRGBR

GBRGBRGBR

GBRGBRGBR

GBRGBRGBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBRGBRGBR

GBRGBRGBRGBR

GBR

GBRGBRGBRGBRGBR

GBRGBR

GBRGBR

GBR

GBRGBRGBRGBR

GBR

GBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBRGBR

GBRGBRGBRGBRGBR

GBR

GBR

GBR

GBRGRC

GRCGRCGRC

GRCGRC

GRC

GRCGRCGRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRC

GRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRC

GRCGRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRCGRC

GRC

GRCGRC

GRCGRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRCGRC

GRC

GRC

GRCGRC

GRC

GRC

GRC

GRCGRCGRCGRC

IND INDIND

INDINDINDIND

INDIND

INDINDIND

INDINDIND

INDINDINDIND

IND

IND

IND

IND

INDIND

IND

IND

IND

IND

IND

INDINDIND

INDIND

IND

INDIND

INDIND

INDIND

INDINDINDIND

IND

INDIND

IND

IND

IND

IND

IND

IND

IND

INDIND

IND

INDINDIND

IND

INDIND

IND

IND

IND

IND

INDIND

INDIND

IND

INDINDINDIND

INDIND

IND

INDIND

INDINDIRL IRL

IRLIRLIRLIRLIRL

IRLIRL

IRL IRLIRLIRLIRLIRL

IRLIRLIRLIRL IRLIRL IRL

IRLIRLIRL IRL IRLIRL

IRLIRL

IRLIRLIRLIRL

IRLIRL IRL

IRLIRL

IRL IRLIRLIRLIRL

IRLIRL IRL IRLIRLIRLIRL

IRLIRL

IRL IRLIRL

IRLIRL IRLIRL IRLIRL

IRLIRL

IRLIRL

IRLIRL

IRLIRLIRLIRL IRL

IRLIRL

IRLIRLIRL

IRL IRL

IRL

IRLIRL

IRL

IRLIRL

ISRISR

ISR

ISRISR

ISRISR

ISRISR

ISR

ISRISRISR

ISR

ISR

ISR

ISRISR

ISRISRISR

ISRISR

ISRISRISRISR

ISR

ISRISR

ISRISR ISRISRISRISR

ISRISRISR

ISR

ISR

ISRISRISR

ISR

ISR

ISR

ISRISR

ISRISR

ISR

ISR

ISRISR

ISRISR

ISR

ISRISRISR

ISRISR

ISR

ISR

ISR

ISRISR

ISRISRISRISR

ISR

ISRISR

ISR

ISRISR

ISRISR

ISR

ISRISRISR

ISRITA

ITA

ITAITAITA

ITA

ITAITAITA

ITAITAITA

ITA

ITA

ITA

ITA

ITA

ITA

ITAITAITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITA

ITA

ITAITAITA

ITAITA

ITAITAITA

ITAITA

ITAITA

ITA

ITA

ITA

ITAITAITA

ITAITAITA

ITA

ITAITA

ITA

ITAITAITA

ITA

ITA

ITAITA

ITA

ITAITA

ITA

ITAITAITA

ITAITA

ITA ITA

ITAITAITAITA

ITAITAITA

ITAITA

JPNJPN

JPNJPN

JPNJPN

JPNJPN JPN

JPN

JPNJPNJPN

JPN

JPN JPNJPN

JPNJPN JPN

JPN

JPNJPNJPN

JPNJPN

JPN

JPN

JPNJPNJPN

JPNJPNJPNJPNJPN

JPNJPNJPNJPNJPNJPNJPN JPNJPN JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPNJPN

JPN

JPN

JPNJPN

JPNJPN

JPNJPN

JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPN

JPNJPNJPNJPNJPN

JPNJPN

JPN

JPNJPNJPNJPNJPN

JPNKOR

KORKORKORKOR

KORKOR

KORKOR

KORKORKOR

KOR

KOR

KORKORKORKORKORKOR

KORKOR

KORKORKOR

KORKOR

KOR

KORKOR

KORKORKOR

KORKORKOR

KORKOR

KOR

KORKORKOR

KORKORKOR

KORKOR

KOR

KORKOR KORKOR

KORKORKORKORKOR

KOR

KORKOR

KORKORKOR

KORKOR

KOR

KOR KORKOR

KOR

KORKORKOR

KORKOR

KORKOR

KOR

KORKOR

KOR

KORKORKOR

KORKOR

KORKOR

MEX

MEXMEX

MEXMEXMEXMEX

MEXMEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEXMEXMEX

MEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEXMEXMEX

MEXMEXMEXMEXMEXMEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEX

MEXMEXMEX

MEX

MEX

MEXMEX

MEXMEXMEX

MEX

MEX

MEX

MEX

MYS

MYS

MYSMYS

MYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYS

MYS

MYS

MYS

MYSMYSMYSMYS

MYS

MYS

MYSMYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYSMYSMYS

MYS

MYS

MYSMYS

MYS

MYS

MYSMYS

MYSMYS

MYSMYSMYSMYS

MYSMYS

MYSMYSMYS

MYS

MYSMYSMYS

MYSMYS

MYSMYSMYS

MYSMYSMYSMYSMYSMYS

MYS

MYS

MYSMYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYS

MYS

MYSMYSMYS

MYSNOR

NORNOR

NOR

NOR

NOR

NORNOR

NORNOR

NORNORNOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NORNOR

NORNORNOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NORNORNOR

NOR

NORNOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NORNORNORNOR

NORNORNOR

NOR

NORNOR

NORNORNORNORNOR

NORNOR

NOR

NORNORNOR

NOR

NOR

NORNOR

NOR

NORNOR

NZL

NZL

NZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZLNZLNZL

NZLNZLNZL

NZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZLNZL

NZLNZLNZL

NZL

NZLNZLNZL

NZLNZLNZL

NZL

PAK

PAKPAK

PAKPAK

PAK

PAK

PAK

PAKPAK

PAKPAKPAK

PAK

PAK

PAKPAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAKPAK

PAKPAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAKPAKPAKPAK

PAK

PAK

PAKPAK

PAK

PAK

PAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAK

PAKPAK

PAK

PAKPAKPAK

PAK

PAK

PAKPAKPAKPAKPAKPAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAK

PAKPERPER

PERPER

PERPER

PERPERPER

PERPERPERPER

PERPER

PER

PER

PERPER

PER

PER

PERPER

PER

PER

PER

PER

PERPERPER

PERPERPERPER

PER

PER

PERPER

PER

PER

PER

PERPER

PERPER

PERPER

PER

PER

PER

PERPERPER

PERPER

PERPER

PERPERPER

PERPER

PER

PERPER

PERPERPER

PERPERPER

PER

PER

PER

PER

PERPER

PERPER

PERPER

PERPHLPHLPHL

PHLPHLPHL

PHL

PHLPHL

PHL PHL

PHLPHL

PHLPHLPHL

PHLPHLPHL

PHLPHL

PHL

PHLPHLPHLPHL

PHLPHLPHL

PHLPHLPHL

PHL

PHLPHL PHL PHL

PHL

PHLPHL

PHL

PHL PHL

PHLPHLPHL

PHLPHL

PHLPHL

PHLPHL

PHLPHLPHL

PHLPHLPHL

PHLPHLPHL

PHLPHLPHLPHL

PHL

PHLPHLPHL

PHL

PHLPHL

PHLPHL

PHL

PHL PHLPHL

PHLPHL

PRTPRT

PRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRTPRT

PRTPRT

PRT

PRTPRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRTPRT

PRTPRTPRTPRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRT

PRTPRT

PRT

PRT

PRT

PRT

PRTPRT

PRT

PRTPRTPRT

PRT

PRT

PRTPRT

PRTPRT

PRT

PRT

PRT

PRT

RUSRUSRUS

RUS

RUSRUSRUS

RUSRUS

RUSRUS RUSRUSRUS

RUSRUS

RUSRUS

RUSRUSRUS

RUS RUS

RUS

RUSRUSRUS

RUS

RUS

RUSRUS

RUS

RUS

RUSRUSRUS

RUSRUSRUS RUSRUS

RUSRUS

RUSRUSRUSRUSRUSRUSRUSRUSRUS

RUSRUSRUSRUSRUSRUS RUS

RUSRUSRUS

RUS

RUSRUSRUSRUS

RUSRUS

RUSRUS

RUSRUS

RUSRUSRUS

RUSRUS

RUS

RUSRUS

RUS

RUS RUSRUS

RUS

SWE

SWE

SWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWESWESWESWE

SWESWE

SWESWE

SWESWESWESWE

SWESWESWE

SWE

SWE

SWESWESWE

SWESWE

SWE

SWE

SWESWESWE

SWE

SWE

SWE

SWESWE

SWESWE

SWESWESWE

SWESWE

SWE

SWESWE

SWESWE

SWESWE

SWESWE

SWESWESWE

SWESWE

SWE

SWE

SWE

SWESWE

SWESWE

SWESWE

SWE

SWESWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWE

SWE

TUR

TURTUR

TURTURTUR

TURTUR

TUR

TUR

TURTURTUR

TURTURTURTUR

TURTUR

TUR

TURTUR

TURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TURTURTUR

TUR

TURTURTURTUR

TUR

TUR TURTURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TUR

TUR

TUR

TUR

TURTURTURTUR

TURTURTURTUR

TURTUR

TUR

TURTUR

TURTUR

TURTURTUR

TURTUR

TUR

TUR

USA

USA

USA

USA

USA

USAUSAUSA

USA

USAUSA

USAUSA

USA

USA

USAUSAUSA

USAUSAUSAUSA

USA

USAUSAUSA

USA

USAUSAUSAUSA

USA

USAUSA

USAUSA

USA

USA

USAUSA

USAUSAUSA

USA

USAUSAUSA

USAUSA

USA

USA

USA

USA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSAUSA

USAUSA

USAUSA

USA

USA

USAUSAUSA

USAUSAUSA

USA

USAUSA

USAUSAUSAUSA

USAUSA

USAUSA

VENVENVENVENVEN

VENVEN VENVEN VENVENVEN

VENVENVENVEN VENVENVEN VENVENVENVEN

VENVENVEN VENVENVEN VENVENVENVEN

VENVEN VENVEN VEN VENVENVENVENVEN VEN VENVENVEN

VENVEN VENVEN VENVENVEN VENVENVENVENVENVENVENVEN

VEN VENVENVEN

VEN VENVENVENVEN

VEN VENVENVENVENVENVEN

VENVEN

VENVEN VENVEN VEN

VENVENVENVEN

VEN VEN

ZAF

ZAFZAFZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

.7.9

1.1

1.3

1.5

Estim

ated

exc

hang

e ra

te e

last

icity

-.5 0 .5Exchange rate shock

Specification 3: REER a la McGuirkExchange rate shock vs. magnitude of demand bias

(b) McGuirk

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARGARG

ARGARGARGARG

ARGARG

ARGARG

ARG

ARGARG

ARGARGARG

ARGARG

ARGARG

ARGARG

ARGARGARGARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARG

ARGARGARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARG

ARGARG

ARG

ARGARG

ARGARG

ARG

ARG

ARGAUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUSAUS

AUS

AUS

AUSAUS

AUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUTAUTAUT

AUT

AUT

AUT

AUT

AUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUTAUT

AUT

AUT

AUTAUTAUT

AUTAUTAUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUTAUTAUT

AUT

AUTAUT

AUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUT

BELBEL

BEL

BEL

BELBELBEL

BEL

BEL

BEL

BELBEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BELBELBELBEL

BELBEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BELBEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BEL

BELBEL

BELBELBEL

BRA

BRABRA

BRABRABRA

BRA

BRA

BRABRABRA

BRA

BRA

BRA

BRA

BRABRA

BRA

BRA

BRA

BRABRABRA

BRA

BRA

BRABRABRA

BRABRA

BRABRA

BRA

BRA

BRABRA

BRA

BRABRABRA

BRA

BRABRABRA

BRABRABRA

BRA

BRABRA

BRA

BRA

BRABRA

BRA

BRA

BRABRA

BRABRA

BRABRA

BRABRABRABRA

BRABRA

BRABRA

BRABRA

BRABRA

BRA

BRABRA

BRA

BRA

BRA

BRABRA

BRABRABRACAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CANCANCANCANCAN

CANCAN

CAN

CAN

CAN

CAN

CAN

CANCAN

CAN

CAN

CAN

CAN

CANCANCANCAN

CANCAN

CAN

CANCAN

CANCANCAN

CAN

CAN

CANCAN

CANCAN

CANCAN

CAN

CAN

CAN

CANCAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CAN

CAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CANCAN

CAN

CANCHECHECHECHECHECHECHECHECHE

CHE

CHE

CHE

CHE

CHE

CHE

CHECHECHECHECHE

CHE

CHE

CHE

CHE

CHECHE

CHE

CHE

CHE

CHE

CHE

CHE

CHECHE

CHE

CHECHE

CHE

CHECHE

CHECHECHE

CHECHE

CHE

CHE

CHE

CHECHE

CHECHE

CHECHE

CHECHE

CHECHECHE

CHE

CHECHE

CHECHE

CHE

CHE

CHE

CHE

CHECHECHE

CHE

CHECHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHLCHL

CHL

CHLCHL

CHL

CHLCHLCHLCHL

CHL

CHLCHL

CHLCHLCHL

CHL

CHL

CHLCHL

CHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHLCHL

CHLCHLCHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHL

CHL

CHLCHLCHL

CHLCHL

CHLCHL

CHLCHLCHLCHL

CHL

CHLCHL

CHL

CHL

CHL

CHL

CHL

CHLCHL

CHL

CHLCHL

CHLCHLCHL

CHLCHL

CHL

CHLCHL

CHL

CHL

CHLCHLCHLCHNCHN

CHN CHN

CHN

CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHNCHN

CHN

CHN

CHNCHNCHN

CHN

CHN

CHN

CHN

CHNCHN

CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHNCHNCHN

CHNCHNCHN

CHN

CHNCHNCHNCHN

CHNCHN

CHNCHNCHN

CHNCHN CHN

CHNCHNCHN

CHN

CHN

CHN

CHNCHNCHN

CHN

CHNCHNCHN

CHNCHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHN

CHNCHNCHNCHNCHN

CHNCHN

CHN

CHN

COLCOL

COL

COL

COL

COL

COLCOL

COL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOLCOL

COLCOL

COLCOLCOL

COL

COL

COL

COLCOL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOL

COL

COL

COL

COL

COLCOL

COL

COL

COL

COL

COL

COL

COL

COLCOL

COL

COL

COL

COL

COL

COLCOLCOLCOL

COLCOL

COLCOL

COLCOLCOL

COL

COL

COL

COL

COL

COL

COLDEU

DEUDEUDEUDEU

DEU

DEUDEU DEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEUDEU

DEU

DEUDEU

DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DEU

DEUDEUDEU

DEU

DEUDEU

DEU

DEUDEU DEUDEU

DEU

DEU

DEUDEUDEU

DEUDEU

DEUDEU

DEUDEU

DEU

DEU

DEUDEUDEU

DEUDEUDEUDEU

DEU

DEUDEU

DEUDEU

DEUDEU

DEU

DEUDEUDEUDEUDEU

DEUDEU

DEUDEU

DEUDEUDEU

DEU DNK

DNK

DNK

DNK

DNKDNKDNKDNKDNK

DNK

DNKDNK

DNK

DNKDNK

DNK

DNK

DNK

DNK

DNK

DNKDNKDNK

DNKDNK

DNK

DNK

DNK

DNK

DNK

DNK

DNK

DNK

DNKDNK

DNK

DNK

DNKDNK

DNK

DNKDNK

DNKDNK

DNK

DNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNK

DNK

DNK

DNK

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZAEGY

EGYEGY

EGY

EGY

EGY

EGYEGY

EGY

EGYEGYEGYEGY

EGY

EGY

EGYEGYEGY

EGYEGY

EGY

EGYEGY

EGY

EGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGY

EGYEGY

EGY

EGY

EGY

EGY

EGYEGY

EGY

EGY

EGYEGYEGY

EGY

EGYEGY

EGY

EGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGY

EGYEGY

EGYEGY

EGYEGY

EGY

EGYEGY

ESPESP

ESPESP

ESPESPESPESP

ESP

ESP

ESPESP

ESP

ESP

ESP

ESP

ESP

ESPESP

ESP

ESPESP

ESP

ESP

ESP

ESP

ESP

ESPESP

ESP

ESPESPESPESPESP

ESPESPESPESPESP

ESPESP

ESP

ESPESP

ESP

ESPESP

ESPESPESP

ESPESPESP

ESP

ESPESP

ESP

ESP

ESP

ESPESPESPESP

ESP

ESP

ESPESP

ESP

ESP

ESP

ESPESPESP

ESP

ESPESP

ESP

ESPESP

ESPESP

ESPESPESP

ESP

ESPESPESPESPESP

ESP

ESP FINFIN

FIN

FINFINFINFIN

FINFIN

FIN

FINFIN

FINFIN

FIN

FIN

FINFIN

FIN

FIN

FIN

FIN

FIN

FINFINFIN

FINFIN

FIN

FINFIN

FIN

FINFIN

FIN

FINFIN

FIN

FINFIN

FINFIN

FINFIN

FIN FINFIN

FINFINFIN

FIN

FINFIN

FIN

FIN

FINFIN

FINFINFIN

FIN

FINFIN

FINFINFINFINFIN

FINFIN FINFINFINFIN

FINFINFIN

FIN

FINFINFIN

FIN

FINFINFIN

FIN

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRA

FRA

FRAFRAFRA

FRA

FRAFRA

FRA

FRAFRA

FRA

FRAFRA

FRA

FRA

FRA

FRA

FRAFRAFRA

FRA

FRA

FRAFRA

FRA

FRAFRA

FRAFRA

FRA

FRA

FRA

FRA

FRA

FRA

FRAFRA

FRA

FRA

FRAFRA

FRAFRA

FRA

FRAFRAFRA

FRAFRAFRA

FRAFRA

FRAFRAFRA

FRA

FRAFRA

FRAFRA

FRA

FRA

FRAFRAFRA

FRA

FRA

FRAFRAFRA

FRA

FRAFRA

FRA

FRA

FRAFRAFRAFRA

FRAFRA

FRA

FRAFRAFRA

FRAGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBRGBR

GBR

GBR

GBR

GBRGBRGBR

GBR

GBR

GBRGBRGBR

GBRGBR

GBRGBRGBR

GBRGBRGBR

GBRGBRGBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBRGBRGBR

GBRGBRGBR

GBR

GBR

GBRGBRGBRGBR

GBR

GBRGBR

GBRGBR

GBR

GBR

GBRGBRGBR

GBR

GBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBR

GBRGBRGBRGBRGBR

GBRGBR

GBR

GBR

GBRGRC

GRCGRCGRC

GRCGRC

GRC

GRCGRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRC

GRCGRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRCGRC

GRC

GRC

GRCGRC

GRC

GRC

GRC

GRCGRCGRCGRC

INDIND

INDINDINDIND

IND

INDIND

INDIND

IND

INDINDIND

INDINDINDIND

IND

IND

IND

IND

IND

INDIND

IND

IND

IND

IND

INDIND

IND

INDIND

IND

INDIND

INDIND

INDIND

IND

INDINDIND

IND

INDIND

IND

IND

IND

IND

IND

IND

IND

INDIND

IND

INDINDIND

IND

IND

IND

IND

IND

IND

IND

INDIND

INDIND

IND

INDINDIND

IND

INDIND

IND

IND

IND

INDINDIRL

IRL

IRLIRLIRLIRLIRL

IRLIRL

IRL IRLIRLIRL

IRLIRL

IRLIRLIRLIRL IRL

IRL IRL

IRLIRLIRL IRL IRLIRL

IRL

IRL

IRLIRLIRL

IRLIRL

IRL IRLIRL

IRL

IRLIRL

IRLIRLIRL

IRLIRL IRL IRL

IRLIRLIRL

IRLIRL

IRLIRL

IRL

IRLIRL

IRLIRL IRLIRL

IRLIRL

IRLIRL

IRLIRL

IRLIRLIRL

IRL IRLIRL

IRL

IRL

IRLIRL

IRL IRL

IRL

IRLIRL

IRL

IRLIRL

ISR

ISR

ISR

ISRISR

ISRISR

ISR

ISR

ISR

ISRISRISR

ISR

ISR

ISR

ISR

ISR

ISRISRISR

ISRISR

ISRISRISRISR

ISR

ISR

ISR

ISRISRISRISRISR

ISR

ISRISRISR

ISR

ISR

ISRISRISR

ISR

ISR

ISR

ISRISR

ISRISR

ISR

ISR

ISRISR

ISRISR

ISR

ISRISR

ISR

ISR

ISRISR

ISR

ISR

ISRISR

ISRISRISR

ISR

ISR

ISR

ISR

ISR

ISR

ISR

ISRISR

ISR

ISRISR

ISR

ISRITA

ITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITAITA

ITA

ITA

ITA

ITA

ITA

ITA

ITAITA

ITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITA

ITA

ITAITA

ITA

ITAITA

ITAITAITA

ITAITA

ITAITA

ITA

ITA

ITA

ITAITA

ITAITA

ITA ITA

ITA

ITA

ITA

ITA

ITAITAITA

ITA

ITA

ITAITA

ITA

ITAITA

ITA

ITAITAITA

ITAITA

ITAITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITAJPN

JPN

JPNJPN

JPN

JPNJPN

JPNJPN

JPN

JPNJPN JPN

JPN

JPNJPNJPN

JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPN

JPN

JPN

JPNJPNJPN

JPNJPN JPNJPNJPN

JPN

JPNJPNJPNJPNJPNJPNJPN

JPNJPN

JPNJPN

JPN

JPNJPNJPN

JPNJPNJPN

JPN

JPN

JPNJPN

JPNJPN

JPNJPN

JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPN

JPNJPNJPNJPNJPN

JPNJPN

JPN

JPN JPNJPNJPNJPN

JPNKOR

KORKORKORKOR

KORKOR

KORKOR

KORKORKOR

KOR

KOR

KORKORKORKORKOR

KOR

KORKOR

KOR

KORKORKOR

KORKOR

KORKOR

KOR

KOR KOR

KOR

KORKOR

KORKOR

KOR

KOR

KORKOR

KOR KOR KOR

KORKOR

KOR

KORKOR

KOR

KOR

KORKORKORKORKOR

KOR

KORKOR

KORKOR

KOR

KORKOR

KOR

KORKOR

KOR

KOR

KORKOR

KORKOR

KOR

KORKOR

KOR

KORKOR

KOR

KORKOR

KORKOR

KORKORKOR

MEX

MEXMEX

MEXMEX

MEXMEX

MEX

MEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEXMEXMEX

MEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEXMEX

MEX

MEXMEXMEXMEXMEXMEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEX

MYS

MYS

MYSMYS

MYSMYS

MYS

MYSMYSMYS

MYS

MYSMYS

MYS

MYS

MYS

MYS

MYSMYSMYSMYS

MYS

MYS

MYSMYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYS

MYSMYSMYS

MYS

MYSMYS

MYS

MYS

MYSMYS

MYSMYS

MYS

MYSMYSMYS

MYSMYS

MYSMYSMYS

MYS

MYS

MYSMYSMYSMYS

MYSMYS

MYS

MYSMYSMYSMYSMYSMYS

MYS

MYS

MYSMYSMYS

MYSMYSMYS

MYS

MYS

MYSMYS

MYS

MYS

MYSMYS

MYS

MYSNOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NORNOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNORNOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NORNORNOR

NOR

NORNOR

NORNOR

NORNOR

NORNORNORNOR

NOR

NORNOR

NOR

NORNORNOR

NOR

NOR

NORNOR

NOR

NORNOR

NZL

NZL

NZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZLNZL

NZL

NZLNZLNZL

NZL

NZLNZL

NZL

PAK

PAK

PAK

PAK

PAKPAK

PAK

PAK

PAKPAK

PAKPAKPAK

PAK

PAK

PAK

PAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAK

PAK

PAKPAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAKPAKPAKPAK

PAK

PAK

PAKPAK

PAK

PAK

PAK

PAK

PAK

PAKPAK

PAK

PAK

PAK

PAK

PAK

PAKPAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAK

PAKPAK

PAK

PAK

PAKPAK

PAKPAKPAK

PAK

PAK

PAK

PAKPAK

PAK

PAKPAK

PAKPAKPER

PER

PERPER

PERPER

PERPER

PER

PERPERPER

PERPER

PER

PER

PER

PER

PER

PER

PER

PERPER

PER

PER

PER

PER

PERPER

PERPER

PERPERPER

PER

PER

PERPER

PER

PER

PER

PERPER

PER

PERPER

PER

PER

PER

PER

PER

PERPER

PERPER

PERPER

PERPERPER

PER

PER

PER

PER

PER

PERPERPER

PERPERPER

PER

PER

PER

PER

PERPER

PERPER

PER

PER

PERPHLPHLPHL

PHLPHLPHL

PHL

PHL

PHL

PHLPHL

PHLPHL

PHLPHL

PHLPHLPHL

PHLPHL

PHL

PHL

PHLPHL

PHLPHL

PHLPHL

PHL

PHLPHLPHL

PHL

PHLPHL

PHLPHL

PHL

PHLPHL

PHL

PHLPHL

PHLPHLPHL

PHLPHL

PHLPHL

PHL

PHLPHL

PHLPHL

PHLPHL

PHLPHLPHL

PHLPHL

PHLPHLPHL

PHL

PHLPHLPHL

PHL

PHL

PHL

PHLPHL

PHL

PHL PHLPHL

PHLPHL

PRTPRT

PRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRTPRT

PRT

PRT

PRT

PRTPRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRT

PRTPRTPRT

PRTPRTPRT

PRT

PRT

PRTPRT

PRTPRTPRT

PRTPRT

PRTPRT

PRTPRTPRT

PRTPRT

PRT

PRT

PRTPRT

PRT

PRT

PRT

PRT

PRT

PRT

PRT

PRTPRTPRT

PRT

PRT

PRTPRT

PRTPRT

PRT

PRT

PRT

PRT

RUS

RUSRUSRUS

RUS

RUSRUS

RUSRUS

RUSRUSRUSRUS

RUS

RUSRUS

RUS

RUS

RUSRUSRUS

RUSRUS

RUS

RUSRUSRUS

RUS

RUS

RUSRUS

RUS

RUS

RUS RUS

RUS

RUSRUSRUSRUS

RUS

RUSRUS

RUSRUSRUSRUSRUSRUS

RUSRUS

RUSRUSRUS

RUSRUSRUSRUS

RUS

RUSRUSRUS

RUS

RUSRUSRUSRUS

RUSRUS

RUS

RUS

RUS

RUSRUS

RUSRUS

RUSRUS

RUS

RUSRUS

RUS

RUSRUS

RUS

RUS

SWE

SWE

SWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWESWESWESWE

SWESWE

SWESWE

SWESWE

SWESWESWE

SWE

SWE

SWE

SWE

SWESWESWE

SWESWE

SWE

SWE

SWESWESWE

SWE

SWE

SWE

SWESWE

SWESWE

SWESWE

SWE

SWESWE

SWE

SWESWE

SWESWE

SWESWE

SWESWE

SWESWE

SWE

SWESWE

SWE

SWE

SWE

SWE

SWE

SWE

SWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWE

SWE

TUR

TUR

TURTUR

TURTUR

TUR

TURTUR

TUR

TURTUR

TURTURTUR

TURTUR

TURTUR

TUR

TURTUR

TURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TURTURTUR

TUR

TURTURTURTUR

TUR

TURTUR

TURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TUR

TUR

TUR

TUR

TURTURTUR

TURTUR

TURTURTUR

TUR

TUR

TUR

TUR

TUR

TURTUR

TURTUR

TUR

TURTUR

TUR

TUR

USA

USA

USA

USA

USA

USAUSAUSA

USA

USA

USAUSAUSA

USA

USA

USA

USAUSA

USAUSAUSA

USA

USA

USAUSAUSA

USA

USAUSAUSAUSA

USA

USAUSA

USAUSA

USA

USA

USAUSA

USAUSAUSA

USA

USAUSAUSA

USA

USA

USA

USA

USA

USA

USAUSAUSAUSAUSAUSA

USA

USAUSAUSA

USAUSA

USA

USAUSA

USA

USA

USAUSAUSA

USAUSAUSA

USA

USA

USA

USAUSAUSAUSA

USAUSA

USAUSA

VENVENVEN

VENVENVEN

VEN VENVEN VENVENVEN

VENVENVENVENVEN

VEN VENVENVENVENVEN

VENVENVEN VENVENVEN VENVEN

VENVENVEN

VEN VENVEN VEN VENVENVENVENVEN VEN VENVENVENVENVEN VENVEN VENVENVEN VENVENVENVENVENVENVEN

VENVEN VENVEN

VEN

VEN VENVENVENVEN

VEN VENVENVENVENVENVEN

VENVEN

VENVEN

VENVEN VENVEN

VENVENVENVEN VEN

ZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAFZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

.81

1.2

1.4

Estim

ated

exc

hang

e ra

te e

last

icity

-.6 -.4 -.2 0 .2Exchange rate shock

Specification 4: dln approximationExchange rate shock vs. magnitude of demand bias

(c) Log-approximation

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARGARG

ARGARGARGARG

ARGARGARG

ARG

ARG

ARGARG

ARGARGARGARG

ARGARG

ARGARGARG

ARGARGARGARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARG

ARG

ARG

ARG

ARGARG

ARG

ARG

ARG

ARGARG

ARGARGARG

ARG

ARG

ARGARG

ARG

ARG

ARGARG

ARGARGARG

ARG

ARG

ARG

ARG

ARGARG

ARGARG

ARG

ARGARG

ARG

ARG

ARGAUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUSAUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUSAUS

AUS

AUS

AUS

AUS

AUSAUS

AUSAUSAUS

AUS

AUS

AUS

AUS

AUS

AUS

AUSAUSAUS

AUS

AUSAUSAUSAUS

AUSAUS

AUSAUS

AUS

AUSAUS

AUSAUS

AUS

AUSAUS

AUS

AUS

AUSAUSAUSAUSAUSAUS

AUS

AUS

AUS

AUSAUS

AUS

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUTAUTAUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUT

AUTAUT

AUT

AUT

AUTAUTAUT

AUTAUTAUT

AUT

AUT

AUTAUT

AUTAUTAUTAUT

AUT

AUT

AUT

AUT

AUT

AUTAUTAUT

AUTAUT

AUT

AUTAUTAUT

AUTAUT

AUTAUT

AUT

AUTAUT

AUT

AUT

AUT

AUTAUTAUT

BELBEL

BEL

BEL

BELBELBEL

BEL

BEL

BEL

BELBEL

BELBEL

BEL

BEL

BEL

BEL

BELBEL

BELBELBEL

BELBEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BEL

BELBEL

BEL

BELBEL

BEL

BELBEL

BELBEL

BEL

BELBEL

BELBEL

BELBEL

BEL

BEL

BEL

BELBEL

BEL

BEL

BELBEL

BELBELBEL

BELBEL

BELBEL

BEL

BEL

BEL

BEL

BELBEL

BELBELBEL

BRA

BRABRA

BRABRABRA

BRA

BRA

BRABRABRA

BRA

BRA

BRA

BRA

BRABRA

BRA

BRA

BRA

BRABRABRA

BRA

BRA

BRABRABRABRABRA

BRABRA

BRA

BRA

BRABRA

BRA

BRABRABRABRA

BRABRABRA

BRABRABRA

BRA

BRABRA

BRA

BRABRA

BRA

BRA

BRA

BRABRA

BRABRABRA

BRABRABRA

BRABRABRA

BRABRA

BRABRA BRA BRABRA

BRA

BRABRABRA

BRA

BRA

BRABRA

BRABRABRACAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CANCANCANCANCANCAN

CAN

CAN

CAN

CANCAN

CAN

CANCAN

CAN

CAN

CAN

CAN

CANCANCANCAN

CANCAN

CAN

CANCAN

CANCANCAN

CAN

CAN

CANCAN

CANCAN

CANCAN

CANCAN

CAN

CANCAN

CANCAN

CAN

CANCAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CAN

CAN

CAN

CANCAN

CAN

CAN

CANCANCAN

CAN

CANCAN

CANCANCHECHECHECHECHECHECHECHECHE

CHE

CHECHE

CHE

CHE

CHE

CHECHECHECHECHE

CHE

CHE

CHE

CHECHECHE

CHE

CHE

CHE

CHECHE

CHECHECHE

CHE

CHECHE

CHE

CHECHECHE

CHECHECHECHE

CHE

CHE

CHE

CHECHE

CHECHECHE

CHE

CHECHE

CHECHECHE

CHECHECHE

CHECHE

CHE

CHE

CHE

CHECHECHECHE

CHE

CHECHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHE

CHE

CHE

CHE

CHECHE

CHLCHLCHL

CHLCHL

CHL

CHLCHLCHLCHL

CHLCHL

CHLCHLCHL

CHL

CHL

CHL

CHLCHL

CHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHLCHL

CHLCHLCHLCHL

CHLCHLCHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHL

CHLCHL

CHL

CHL

CHL

CHLCHLCHL

CHLCHL

CHLCHL

CHLCHLCHLCHL

CHL

CHLCHL

CHL

CHL

CHL

CHL

CHLCHL

CHL

CHL

CHLCHLCHLCHL

CHLCHLCHL

CHL

CHLCHL

CHL

CHL

CHLCHLCHLCHNCHN

CHNCHNCHN

CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHNCHNCHN

CHN

CHNCHNCHN

CHN

CHN

CHN

CHNCHN CHN CHNCHNCHN

CHNCHN

CHN

CHNCHN

CHNCHNCHN CHNCHNCHN

CHN

CHNCHNCHNCHN

CHNCHN

CHNCHNCHNCHN

CHNCHN CHNCHNCHN

CHNCHN

CHN

CHNCHNCHN

CHNCHNCHN CHN CHNCHNCHN

CHN

CHNCHN

CHNCHN

CHNCHN

CHN

CHNCHN CHNCHNCHNCHNCHN

CHNCHN

COLCOL

COLCOL

COL

COL

COLCOL

COL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOLCOL

COLCOL

COLCOLCOL

COL

COL

COL

COLCOL

COL

COLCOL

COL

COL

COL

COLCOL

COLCOL

COL

COL

COL

COL

COLCOL

COL

COL

COL

COL

COL

COL

COLCOL

COLCOL

COL

COL

COL

COL

COLCOLCOLCOL

COLCOL

COLCOL

COLCOLCOL

COL

COLCOL

COL

COL

COL

COLDEU

DEUDEUDEUDEU

DEU

DEUDEUDEUDEUDEUDEUDEUDEU

DEUDEUDEUDEU

DEUDEU

DEU

DEUDEU

DEU DEUDEU

DEUDEUDEU

DEUDEU

DEUDEU

DEU

DEUDEUDEU

DEU

DEUDEU

DEU

DEUDEUDEUDEU

DEU

DEU

DEUDEU DEUDEU

DEU

DEUDEU

DEUDEU

DEU

DEUDEUDEU

DEUDEUDEUDEU

DEUDEU

DEUDEU

DEUDEUDEU

DEU

DEU

DEUDEUDEUDEUDEU

DEUDEUDEU

DEUDEU

DEUDEUDEU DNK

DNK

DNK

DNK

DNKDNKDNKDNKDNK

DNK

DNKDNKDNK

DNKDNK

DNKDNK

DNKDNK

DNK

DNKDNKDNK

DNKDNK

DNK

DNKDNK

DNK

DNK

DNK

DNK

DNK

DNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNK

DNK

DNK

DNKDNK

DNKDNK

DNK

DNKDNKDNKDNK

DNK

DNK

DNK

DNK

DNK

DNK

DZA

DZA

DZA

DZADZA

DZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZA

DZA

DZA

DZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZADZA

DZADZA

DZA

DZA

DZA

DZADZA

DZA

DZA

DZADZA

DZA

DZAEGY

EGYEGY

EGY

EGY

EGY

EGYEGY

EGY

EGYEGYEGYEGY

EGY

EGYEGY

EGYEGY

EGYEGY

EGY

EGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGY

EGYEGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGY

EGYEGYEGY

EGYEGYEGY

EGY

EGY

EGYEGY

EGY

EGY

EGY

EGY

EGY

EGYEGY

EGYEGYEGY

EGY

EGYEGY

EGY

EGYEGY

EGYEGY

EGY

EGYEGY

EGYEGYEGY

EGY

EGY

EGYEGY

ESPESP

ESPESP

ESPESPESPESP

ESP

ESPESPESP

ESP

ESP

ESP

ESP

ESP

ESPESPESP

ESPESP

ESPESP

ESPESP

ESP

ESPESP

ESP

ESPESPESPESPESP

ESPESPESPESPESP

ESPESP

ESP

ESPESP

ESPESP

ESPESPESP

ESPESPESPESP

ESP

ESPESP

ESP

ESP

ESP

ESPESPESPESP

ESP

ESPESPESP

ESP

ESP

ESP

ESPESPESP

ESP

ESPESP

ESP

ESPESPESPESP

ESPESPESP

ESP

ESPESPESPESPESP

ESP

ESP FINFIN

FIN

FINFINFINFIN

FINFIN

FINFINFIN FINFIN

FINFIN

FINFIN

FIN

FINFIN

FIN

FIN

FINFINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFIN

FINFINFIN

FINFINFINFIN

FINFIN

FIN

FINFIN

FINFIN

FINFINFIN

FINFIN

FINFINFINFINFIN

FINFINFINFINFINFIN

FINFINFIN

FIN

FINFINFIN

FIN

FINFINFINFIN

FRA

FRAFRA

FRAFRAFRA

FRA

FRA

FRA

FRA

FRAFRAFRAFRA

FRAFRA

FRA

FRAFRA

FRA

FRAFRA

FRA

FRA

FRA

FRAFRAFRAFRA

FRA

FRA

FRAFRA

FRA

FRAFRA

FRAFRA

FRA

FRA

FRA

FRA

FRA

FRAFRA

FRA

FRA

FRA

FRAFRA

FRAFRA

FRA

FRAFRAFRA

FRAFRAFRA

FRAFRA

FRAFRAFRA

FRA

FRAFRAFRAFRAFRA

FRA

FRAFRAFRA

FRA

FRA

FRAFRAFRA

FRA

FRAFRA

FRA

FRA

FRAFRAFRAFRA

FRAFRAFRA

FRAFRAFRA

FRAGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBRGBRGBR

GBR

GBR

GBRGBRGBR

GBR

GBR

GBRGBRGBR

GBRGBR

GBRGBRGBR

GBRGBRGBR

GBRGBRGBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBRGBRGBR

GBRGBRGBRGBR

GBR

GBRGBRGBRGBRGBR

GBRGBR

GBRGBR

GBR

GBRGBRGBRGBR

GBR

GBRGBR

GBRGBR

GBR

GBR

GBR

GBR

GBRGBR

GBR

GBR

GBR

GBR

GBR

GBRGBR

GBRGBRGBRGBRGBR

GBR

GBR

GBR

GBRGRC

GRCGRCGRC

GRCGRC

GRC

GRCGRCGRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRC

GRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRC

GRC

GRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRC

GRCGRC

GRC

GRCGRC

GRC

GRCGRC

GRCGRCGRC

GRC

GRCGRC

GRCGRCGRC

GRC

GRC

GRC

GRC

GRC

GRCGRCGRC

GRCGRC

GRC

GRC

GRCGRC

GRC

GRC

GRC

GRCGRCGRCGRC

IND INDIND

INDINDINDIND

INDIND

INDINDIND

INDINDIND

INDINDINDIND

IND

IND

IND

IND

INDIND

IND

IND

IND

IND

IND

INDINDIND

INDIND

IND

INDIND

INDIND

INDIND

INDINDINDIND

IND

INDIND

IND

IND

IND

IND

IND

IND

IND

INDIND

IND

INDINDIND

IND

INDIND

IND

IND

IND

IND

INDIND

INDIND

IND

INDINDINDIND

INDIND

IND

INDIND

INDINDIRL IRL

IRLIRLIRLIRLIRL

IRLIRL

IRL IRLIRLIRLIRLIRL

IRLIRLIRLIRL IRLIRL IRL

IRLIRLIRL IRL IRLIRL

IRLIRL

IRLIRLIRLIRL

IRLIRL IRL

IRLIRL

IRL IRLIRLIRLIRL

IRLIRL IRL IRLIRLIRLIRL

IRLIRL

IRL IRLIRL

IRLIRL IRLIRL IRLIRL

IRLIRL

IRLIRL

IRLIRL

IRLIRLIRLIRL IRL

IRLIRL

IRLIRLIRL

IRL IRL

IRL

IRLIRL

IRL

IRLIRL

ISRISR

ISR

ISRISR

ISRISR

ISRISR

ISR

ISRISRISR

ISR

ISR

ISR

ISR

ISRISR

ISRISRISR

ISRISRISRISR

ISR

ISR

ISRISR

ISRISR ISRISRISRISR

ISRISRISR

ISR

ISR

ISRISRISR

ISR

ISR

ISR

ISRISR

ISRISR

ISR

ISR

ISRISR

ISRISR

ISR

ISRISRISR

ISRISR

ISR

ISR

ISR

ISRISR

ISRISRISRISR

ISR

ISRISR

ISR

ISRISR

ISRISR

ISR

ISRISRISR

ISRITA

ITA

ITAITAITA

ITA

ITAITAITA

ITAITAITA

ITA

ITA

ITA

ITA

ITA

ITA

ITAITAITA

ITAITAITA

ITA

ITAITA

ITA

ITA

ITA

ITA

ITAITAITA

ITAITA

ITAITAITA

ITAITA

ITAITA

ITA

ITA

ITA

ITAITAITA

ITAITAITA

ITA

ITAITA

ITA

ITAITAITA

ITA

ITA

ITAITA

ITA

ITAITA

ITA

ITAITAITA

ITAITA

ITA ITA

ITAITAITAITA

ITAITAITA

ITAITA

JPNJPN

JPNJPN

JPNJPN

JPNJPN JPN

JPN

JPNJPNJPN

JPN

JPN JPNJPN

JPNJPN JPN

JPN

JPNJPNJPN

JPNJPN

JPN

JPN

JPNJPNJPN

JPNJPNJPNJPNJPN

JPNJPNJPNJPNJPNJPNJPN JPNJPN JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPNJPN

JPN

JPN

JPNJPN

JPNJPN

JPNJPN

JPN

JPNJPN

JPN

JPNJPNJPN

JPNJPN

JPNJPNJPNJPNJPN

JPNJPN

JPN

JPNJPNJPNJPNJPN

JPNKOR

KORKORKORKOR

KORKOR

KORKOR

KORKORKOR

KOR

KOR

KORKORKORKORKORKOR

KORKOR

KORKORKOR

KORKOR

KOR

KORKOR

KORKORKOR

KORKORKOR

KORKOR

KOR

KOR

KORKOR

KORKORKOR

KORKOR

KOR

KORKOR KORKOR

KORKORKORKORKOR

KOR

KORKOR

KORKORKOR

KORKOR

KOR

KOR KORKOR

KOR

KORKOR

KORKOR

KOR

KORKOR

KOR

KORKOR

KOR

KORKORKOR

KORKOR

KORKOR

MEX

MEXMEX

MEXMEXMEXMEX

MEXMEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEXMEXMEX

MEXMEX

MEX

MEX

MEXMEX

MEX

MEX

MEX

MEXMEXMEX

MEXMEXMEXMEXMEXMEXMEX

MEX

MEX

MEX

MEX

MEXMEX

MEX

MEX

MEXMEXMEX

MEX

MEX

MEXMEX

MEXMEXMEX

MEX

MEX

MEX

MEX

MYS

MYS

MYSMYS

MYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYS

MYS

MYS

MYS

MYSMYSMYSMYS

MYS

MYS

MYSMYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYSMYSMYS

MYSMYSMYS

MYS

MYS

MYSMYS

MYS

MYS

MYSMYS

MYSMYS

MYSMYSMYSMYS

MYSMYS

MYSMYSMYS

MYS

MYSMYSMYS

MYSMYS

MYSMYSMYS

MYSMYSMYSMYSMYSMYSMYS

MYS

MYSMYSMYS

MYSMYSMYS

MYSMYS

MYSMYS

MYS

MYS

MYSMYSMYS

MYSNOR

NORNOR

NOR

NOR

NOR

NORNOR

NORNOR

NORNORNOR

NOR

NOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NORNOR

NOR

NORNOR

NORNORNOR

NORNOR

NOR

NOR

NOR

NOR

NOR

NORNORNOR

NOR

NORNOR

NOR

NOR

NOR

NORNOR

NOR

NOR

NOR

NORNORNORNOR

NORNOR

NORNOR

NORNOR

NORNORNORNORNOR

NORNOR

NOR

NORNORNOR

NOR

NOR

NORNOR

NOR

NORNOR

NZL

NZL

NZL

NZL

NZLNZLNZL

NZLNZL

NZL

NZLNZLNZL

NZLNZLNZL

NZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZLNZL

NZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZL

NZLNZL

NZLNZL

NZLNZL

NZL

NZLNZL

NZLNZL

NZLNZLNZL

NZL

NZLNZLNZL

NZLNZLNZL

NZL

PAK

PAKPAK

PAKPAK

PAK

PAK

PAK

PAKPAK

PAKPAKPAK

PAK

PAK

PAKPAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAKPAK

PAKPAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAKPAKPAKPAK

PAK

PAK

PAKPAK

PAK

PAK

PAK

PAK

PAKPAK

PAKPAK

PAK

PAK

PAK

PAK

PAKPAK

PAKPAK

PAK

PAKPAK

PAK

PAK

PAKPAKPAK

PAK

PAK

PAKPAKPAKPAKPAKPAK

PAK

PAK

PAKPAK

PAKPAK

PAKPAK

PAKPERPER

PERPER

PERPER

PERPERPER

PERPERPERPER

PERPER

PER

PER

PERPER

PER

PER

PERPER

PER

PER

PER

PER

PERPERPER

PERPERPERPER

PER

PER

PERPER

PER

PER

PER

PERPER

PERPER

PERPER

PER

PER

PER

PERPERPER

PERPER

PERPER

PERPERPER

PERPER

PER

PERPER

PERPERPERPER

PERPER

PER

PER

PER

PER

PERPER

PERPER

PERPER

PERPHLPHLPHL

PHLPHLPHL

PHL

PHLPHL

PHL PHL

PHLPHL

PHLPHLPHL

PHLPHLPHL

PHLPHL

PHL

PHLPHLPHLPHL

PHLPHLPHL

PHLPHLPHL

PHL

PHLPHL PHL PHL

PHL

PHLPHL

PHL

PHL PHL

PHLPHLPHL

PHLPHL

PHLPHL

PHLPHL

PHL

PHLPHLPHLPHL

PHLPHLPHL

PHLPHL

PHLPHLPHLPHL

PHLPHLPHL

PHL

PHLPHL

PHLPHL

PHL

PHL PHLPHL

PHL PHLPRTPRT

PRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRTPRT

PRTPRT

PRT

PRTPRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRTPRT

PRTPRTPRTPRT

PRTPRTPRT

PRTPRTPRT

PRTPRT

PRT

PRT

PRTPRT

PRT

PRT

PRT

PRT

PRTPRT

PRT

PRTPRTPRT

PRT

PRT

PRTPRT

PRTPRT

PRT

PRT

PRT

PRT

RUSRUSRUS

RUS

RUSRUSRUS

RUSRUS

RUSRUS RUSRUSRUS

RUSRUS

RUSRUS

RUSRUSRUS

RUS RUS

RUS

RUSRUSRUS

RUS

RUS

RUSRUS

RUS

RUS

RUSRUSRUS

RUSRUSRUS RUSRUS

RUSRUS

RUSRUSRUSRUSRUSRUSRUSRUS

RUSRUSRUS

RUSRUSRUSRUS RUS

RUSRUSRUS

RUS

RUSRUSRUSRUS

RUSRUS

RUSRUS

RUSRUS

RUSRUSRUS

RUSRUS

RUS

RUSRUS

RUS

RUS RUSRUS

RUS

SWE

SWE

SWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWESWESWESWE

SWESWE

SWESWE

SWESWESWESWE

SWESWESWE

SWE

SWE

SWESWESWE

SWESWE

SWE

SWE

SWESWESWE

SWE

SWE

SWE

SWESWE

SWESWE

SWESWESWE

SWESWE

SWE

SWESWE

SWESWE

SWESWE

SWESWE

SWESWESWE

SWESWE

SWE

SWE

SWE

SWESWE

SWESWE

SWESWE

SWE

SWESWE

SWE

SWE

SWE

SWESWE

SWE

SWE

SWE

SWE

TUR

TURTUR

TURTURTUR

TURTUR

TUR

TUR

TURTURTUR

TURTURTURTUR

TURTUR

TUR

TURTUR

TURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TURTURTUR

TUR

TURTURTURTUR

TUR

TUR TURTURTUR

TUR

TURTURTUR

TURTUR

TURTUR

TUR

TUR

TUR

TUR

TURTURTURTUR

TURTURTURTUR

TURTUR

TUR

TURTUR

TURTUR

TURTURTUR

TURTUR

TUR

TUR

USA

USA

USA

USA

USA

USAUSAUSA

USA

USAUSA

USAUSA

USA

USA

USAUSAUSA

USAUSAUSAUSA

USA

USAUSAUSA

USA

USAUSAUSAUSA

USA

USAUSA

USAUSA

USA

USA

USAUSA

USAUSAUSA

USA

USAUSAUSA

USAUSA

USA

USA

USA

USA

USAUSAUSAUSAUSAUSA

USAUSA

USAUSAUSA

USAUSA

USAUSA

USA

USA

USAUSAUSA

USAUSAUSA

USA

USAUSA

USAUSAUSAUSA

USAUSA

USAUSA

VENVENVENVENVEN

VENVEN VENVEN VENVENVEN

VENVENVENVEN VENVENVEN VENVENVENVEN

VENVENVEN VENVENVEN VENVENVENVEN

VENVEN VENVEN VEN VENVENVENVENVEN VEN VENVENVEN

VENVEN VENVEN VENVENVEN VENVENVENVENVENVENVENVEN

VEN VENVENVEN

VEN VENVENVENVEN

VEN VENVENVENVENVENVEN

VENVEN

VENVEN VENVEN VEN

VENVENVENVEN

VEN VEN

ZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAF

ZAFZAF

ZAFZAF

ZAF

ZAFZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAF

ZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAFZAF

ZAF

ZAFZAFZAF

ZAFZAF

ZAFZAF

ZAF

ZAF

ZAFZAFZAF

ZAF

ZAF

ZAF

.7.9

1.1

1.3

1.5

Estim

ated

exc

hang

e ra

te e

last

icity

-.5 0 .5Exchange rate shock

Specification 5: Alternative weightsExchange rate shock vs. magnitude of demand bias

(d) Alternative weights

Figure 3: GETI: Relationship between exchange rate shock and the bias in the demand elasticity.

20

Table 3: GETI simulated elasticities of country-specific random exchange rate shocks, stochastic trade costsand θ = −4.

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5)

Exchange rateMean -4 -3.951 -4.022 -4.041 -3.997Bias 0 .049 .022 .041 .003Std dev. 0 .141 .171 .166 .178MSE 1/2 0 .149 .173 .171 .178

Foreign demandMean 1 1.28 1.111 1.092 1.192Bias 0 .28 .111 .092 .192Std dev. 0 .28 .247 .262 .335MSE 1/2 0 .396 .270 .278 .386

Notes: The sample consists of 39 countries and each country receives 100 random exchange rate and trade cost shocks.The total number of estimated exchange rate and demand elasticities is 3900 for each of the 5 different specifications.The top cell labeled "Mean" reports the sample mean of the respective estimates for each type of elasticity. The rowslabeled "Bias" give the estimated bias, where est. bias = sample mean - true value. Rows labeled "Std Dev." give thesample standard deviation of the 3900 point estimates. Rows labeled "MSE1/2" give the square root of the estimatedmean squared error (MSE), where estimated MSE = (est. bias)2 + (std dev)2.

4.3 Monte-Carlo with stochastic trade costs

Up until now, our simulations are based on the assumption that the structural gravity equation is thetrue data-generating process for bilateral trade flows. To allow for the fact that the gravity equationdoes not perfectly explain bilateral trade flows, we run a Monte Carlo exercise and assume, as inHead and Mayer (2014), that bilateral trade flows change due to a stochastic term ηni in the tradecost function:

φni = exp(− ln Distni)ηni, (23)

where Distni is the distance between importer n and exporter i. ηni is a log-normal random termand the only stochastic term in the simulation since GDP and distance are all set by actual data. Wecalibrate the variance of ln(ηni) to replicate the root mean squared error of the least squares dummyvariables (LSDV) regression on real data. We use the method of Dekle et al. (2007) and solve themodel in changes. Based on actual data in trade flows and incomes, we first simulate changes inthe trade costs with a random shock ηni, i.e. τni = ηni, and then calculate the changes in wages, theprices for intermediate goods and the aggregate price indexes resulting from the random exchangerate shock.

Table 3 reports the results. Introducing stochastic trade costs increases the bias and the esti-mation error. The MSE significantly increases for the point estimates of the exchange rate and the

21

demand elasticities. Interestingly, the bias in the demand elasticity becomes more pronounced thanin the exchange rate elasticity. Across specifications, the average magnitude of the bias is close to 20percent for the demand elasticity, whereas it is close to 1 percent for the exchange rate elasticity. Thespecification with the lowest MSE is the log approximation in column (4), suggesting that deflatingthe changes in foreign demand by changes in the aggregate price index is important to reduce thebias in the demand elasticity. These simulation results suggest that with the ideal-REER approach itis possible to estimate the response of aggregate exports to exchange rate changes without bias evenif the data-generating process does not fully adhere to structural gravity.

5 Exchange rate pass-through and currency denomination

We derived our ideal-REER regression specification under two important assumptions. First, markupsdo not vary with the exchange rate. Second, prices are set in an international currency. In this section,we relax these assumptions and discuss alternative estimation methods based on different pricing as-sumptions.

One way to change the exporter’s price response to exchange rates is to follow Anderson et al.(2016) and assume an exogenous pass-through coefficient $in. The pass-through coefficient $in cap-tures the exporter’s price adjustment following a variation in the exchange rate, for example, due tochanges in the markup or price rigidities in the invoicing currency. The coefficient is defined on theunit interval 0 < $in < 1. If the pass-through is complete, the exporter will pass on the entire bilat-eral exchange rate variation to the importer and $in = 0. If the export price is fixed in the destinationcurrency and the exporter absorbs all of the exchange rate variation by changing the markup, thepass-through coefficient equals one, $in = 1. Given this definition, we can write the change in theexport price denominated in importer n’s currency as follows:

PEi =

(ri

rnPii

)1−$in

However, if the pass-through coefficient varies at the bilateral level, we will not be able to iden-tify all parameters at the aggregate level:

ln Ei = ln ∑n 6=i

ωni

((ri

rnPii

)1−$in

P−1n

)−θ

Xn

because the number of parameters to estimate is larger than the number of export equations.Instead, we rely on the dominant currency paradigm (DCP, see Casas et al. (2017)) and assume

that exporter and importer prices are fixed in the dominant (international) currency. In this case,the pass-through coefficient depends only on the exchange rate changes vis-à-vis the internationalcurrency ($in = ρiρn). As a result, we can write the bilateral exchange rate as a product of both the

22

exporter exchange rate and the importer exchange rate to the international currency and neglect theco-variance between the two. Reducing the dimensionality further by assuming a common pass-through coefficient, we can write the DCP export equation as follows:

ln Ei = βREER ln(riPii

)+ βx ln ∑

n 6=iωni

Xn(rnPn

)βREER, (24)

where the estimated exchange rate elasticity represents the product of the trade elasticity and theexchange rate pass-through coefficient (ρ), i.e., βREER = θ(1− ρ), for both the exporter-specific andthe importer-specific components. Introducing incomplete pass-through reduces the effect of theexchange rate but leaves the overall functional form unchanged compared with the baseline specifi-cation in equation 7. The lower exchange rate elasticity implies a reduction in the magnitude of theestimation biases in standard REER specifications discussed above. Both the qualitative results andthe country-specific biases plotted in figures 1 to 3 remain the same.

An alternative pricing assumption is that exporters set their prices in the producer’s currency(Producer Currency Pricing, or PCP) and absorb part of the changes in marginal costs by the com-mon pass-through coefficient ρ. In this case, we cannot split the bilateral exchange rate into anexporter/importer component because the importer-specific component depends on the exporter’sprice reaction following an exchange rate shock. The resulting exporter equation is a function ofthe change in producer prices in the exporter’s currency and a weighted average of foreign demanddeflated by the price index converted into the exporter’s currency:

ln Ei = βREER ln(

Pii)+ βx ln ∑

n 6=iωni

((ri

rn

)1−$

P−1n

)βREER

Xn (25)

The estimated exchange rate elasticity is the same for the exporter- and importer-specific com-ponents only if exchange rate pass-through is complete, i.e., $ = 0. If exchange rate pass-throughis incomplete ($ > 0), the importer-specific component depends on the exporter’s price reactionfollowing an exchange rate shock and the estimated exchange rate elasticity βREER will be biased.17

Finally, the third common pricing assumption is that exporters set their prices in the destina-tion’s currency (Local Currency Pricing, or LCP). Under LCP, exporters absorb the bilateral exchangerate variation and the pass-through on import prices is zero. In this case, the exchange rate shockdoes not affect prices, demand and exports. As a result, there is no counterfactual variation.

Overall, consistent aggregation under incomplete pass-through is only possible when pricesare set in an international currency as postulated by the dominant currency paradigm. If pricesare set in the producer’s currency (producer currency pricing (PCP)) or in the local currency (localcurrency pricing (LCP)), the pass-through depends on the bilateral exchange rate, and estimationof the aggregate elasticities without bias is only possible if pass-through is complete. Next, we test

17Our simulation results, presented in the appendix, show that under the assumption of the complete pass-throughthe estimation biases in standard REER specifications with PCP are qualitatively similar to the ones under DCP.

23

whether the ideal-REER approach also reduces the estimation bias when aggregating bilateral dataempirically.

6 Empirical evidence

A key implication from the theoretical analysis is that running exchange rate regressions on the bilat-eral or on the aggregate level does not lead to a significant bias in the elasticities if the trade elasticityis the same for all countries. While recognizing that in practice exchange rate elasticities differ acrosscountries (see, for example, Spilimbergo and Vamvakidis (2003) or Bussière et al. (2016)), we test thetheoretical prediction of no-significant bias in exchange rate regressions when pooling across coun-tries. Later we relax this assumption and test for significant differences between elasticities estimatedon the bilateral and aggregate levels on a country-per-country basis.

Our empirical approach uses data for bilateral exchange rates from the IMF financial statisticsdatabase. Data on real effective exchange rates are coming from the Bank for International Settle-ments. We use the Narrow Index as it has the advantage of covering a longer sample period. TheNarrow Index is a trade-weighted effective exchange rate over 25 economies (excluding the euroarea). Inflation (proxied by the GDP deflator) and nominal GDP data are from national accounts andconverted into international currency (USD) using the bilateral exchange rate with the USD. Bilateraltrade data are retrieved from CEPII’s historical trade database (see Fouquin and Hugot (2016)). Weuse absorption, defined as GDP minus net exports, to be a proxy for foreign demand. For changes inaggregate export prices, we use producer price indexes (PPI) from national accounts, the OECD andthe IMF depending on data availability. Taken together, our sample comprises a panel of 25 countrieswith yearly observations from 1964 to 2014.

Given that the ideal-REER estimation equation depends on the currency denomination of tradeflows, the first step is to run exchange rate pass-through regressions and shed light on the pricingbehavior of exporters. To estimate the reaction of export prices to exchange rate changes, we followCasas et al. (2017) and regress the export price of country i to country j (denominated in countryi’s currency,PE

i,j,t) on country i’s exchange rate with the USD (ri,USD,t), the bilateral exchange ratebetween country i and country j (rij,t) and the producer price index of country i (PPIi,t), a proxy forchanges in marginal costs:

∆ ln PEi,j,t = α1∆ ln ri,USD,t + α2∆ ln ri,j,t + α3∆ ln PPIi,t + ui,j,t

The results in Table 4 show that the export price varies mainly with the USD exchange rate.The estimated coefficient of the USD exchange rate is −0.15 compared with a bilateral exchange ratecoefficient of −0.05 (see column (4)).

We repeat the exercise for the import side and estimate the reaction of the import price denomi-nated in importer’s currency to exchange rate changes with the following specification:

24

Table 4: Exchange Rate Pass-Through into Export Prices

Dependent variable: Log-change (exporter price)

(1) (2) (3) (4)

Log-change (exchange rate to USD) 0.341∗∗∗ 0.427∗∗ 0.177∗∗ 0.149∗∗

(0.0794) (0.120) (0.0508) (0.0403)

Log-change (bilateral exchange rate) 0.134∗∗ 0.0517∗∗

(0.0423) (0.0169)

Log-change (producer price index) 0.759∗∗∗ 0.744∗∗∗

(0.0617) (0.0680)

Observations 29350 29350 29350 29350R2 0.305 0.331 0.625 0.629Standard errors clustered at the exporting country in parentheses∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

∆ ln PIi,j,t = α1∆ ln ri,USD,t + α2∆ ln ri,j,t + α3∆ ln PPIj,t + ui,j,t,

where PIi,j,t denotes the import price of country i from country j (denominated in country j’s cur-

rency). Similar to the export price, the variation of the import price is predominantly driven by theUSD exchange rate. Table 5 column (4) shows that the pass-through coefficient for the USD importprice is −0.89 while the coefficient of the bilateral exchange rate is −0.21. These findings are similarto Casas et al. (2017) and support the dominant currency paradigm.

Table 5: Exchange Rate Pass-Through into Import Prices

Dependent variable: Log-change (importer price)

(1) (2) (3) (4)

Log-change (exchange rate to USD) 0.445∗∗∗ 0.553∗∗∗ 0.700∗∗∗ 0.869∗∗∗

(0.00752) (0.00986) (0.00811) (0.0124)

Log-change (bilateral exchange rate) 0.170∗∗∗ 0.072∗∗∗

(0.00651) (0.0104)

Log-change (producer price index) 0.434∗∗∗ 0.612∗∗∗

(0.00687) (0.0112)

Observations 29350 29350 29350 29350R2 0.383 0.414 0.539 0.563Standard errors clustered at the importing country in parentheses∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

Next, we evaluate the empirical performance of regression specifications 1 to 5 discussed in the

25

Table 6: Empirical results with variables denominated in current USD (DCP)

Bilateral Aggregate

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5) (6)

Exchange ratePoint estimate -.459 -.409 -.380 -.584 -.291 -.254Std. error (0.024) (0.051) (0.059) (0.057) (0.066) (0.067)Foreign demandPoint estimate 1.184 1.199 .758 1.092 1.207 1.122Std. error. (0.027) (0.063) (0.048) (0.037) (0.083) (0.049)

Observations 27940 1077 1077 1142 1077 1198R2 .157 .567 .570 .612 .579 .516

Notes: The sample consists of 25 countries over the period 1964-2014.

simulation section. We convert all variables into US dollars and use the following definitions for thereal exchange rate and foreign demand.18 The real exchange rate of exporter i (RERit) is defined asthe change in the nominal exchange rate of country i vis-à-vis the USD multiplied by the changein the PPI of country i. To calculate foreign demand, we use the current value of absorption in theimporting country j denominated in the international currency (Xjt). Inflation proxies for changes inthe importer’s price index (Pjt). For the weights ωnit, we use the share of exports of country i goingto country n in year t. This definition of the variables applies to all aggregate regressions with theexception of the REER in the “alternative weights” specification defined in equation 17. In this case,we use the BIS Narrow Index as the REER’s empirical counterpart.

The results are shown in table 6. The first observation is that the elasticities estimated frombilateral trade flows and from aggregate trade flows using the ideal-REER approach are not signif-icantly different from each other. The point estimate of the exchange rate elasticity using bilateralflows is −0.46 (column (1)) and the estimate using the ideal-REER is −0.41 (column (2)). The de-mand elasticities are almost identical with the point estimates of 1.18 and 1.19, respectively. Forall other specifications (columns (3) to (6)), the aggregation method results in significant differencesin the estimated elasticities compared with the bilateral level in column (1). The specification withthe largest gap is the “Gold medal (GM) mistake” approach in column (3) with a point estimate of−0.38 for the exchange rate and 0.76 for the demand elasticity. The standard REER approach basedon McGuirk (column (4)) fits the data best with the highest R2 but produces a higher exchange rate(−0.58) and a lower demand elasticity (1.09). The specification with the lowest R2 is the “Alterna-tive weights” approach in column (6). Overall, these results highlight the trade-off one faces when

18The US is the reference for all countries in our sample except for the US. In this case, the reference currency is thepound sterling.

26

Figure 4: Country-specific estimates of aggregate vs. bilateral demand and exchange rate elasticities.

(a) Baseline ("ideal-REER")

AUTAUS

BEL

CAN

CHEDEUDNKESP

FIN FRAGBRGRC

HKG

IRL

ITAJPN

KOR

MEXNED

NOR

NZL PRT

SWESGP

USA

-1.5

-1-.5

0Ex

chan

ge ra

te e

last

icity

(bila

tera

l lev

el)

-1 -.8 -.6 -.4 -.2 0Exchange rate elasticity (aggregate level)

Red line corresponds to 45 degree line. Blue line is best linear fit with 95 perc. confidence interval.

Bilateral versus aggregate regression estimatesIdeal-REER Exchange Rate Elasticities

AUTAUS BEL

CAN

CHEDEUDNKESP

FIN

FRAGBR

GRCHKG

IRL

ITA

JPN

KOR

MEXNEDNOR

NZLPRT SWESGP

USA

11.

52

Dem

and

elas

ticity

(bila

tera

l lev

el)

1 1.5 2Demand elasticity (aggregate level)

Red line corresponds to 45 degree line. Blue line is best linear fit with 95 perc. confidence interval.

Bilateral versus aggregate regression estimatesIdeal-REER Demand Elasticities

(b) REER McGuirk ("real-REER")

AUTAUS

BEL

CAN

CHEDEUDNK

ESP

FIN FRAGBRGRC

HKG

IRL

ITAJPNKOR

MEXNED

NOR

NZLPRT

SWESGP

USA

-1.5

-1-.5

0Ex

chan

ge ra

te e

last

icity

(bila

tera

l lev

el)

-1.2 -1 -.8 -.6 -.4 -.2Exchange rate elasticity (aggregate level)

Red line corresponds to 45 degree line. Blue line is best linear fit with 95 perc. confidence interval.

Bilateral versus aggregate regression estimatesReal-REER Exchange Rate Elasticities

AUTAUS BEL

CAN

CHEDEUDNKESP

FIN

FRAGBR

GRC HKG

IRL

ITAJPN

KOR

MEXNEDNOR

NZL PRTSWE SGPUSA

.51

1.5

22.

5D

eman

d el

astic

ity (b

ilate

ral l

evel

)

.5 1 1.5 2 2.5Demand elasticity (aggregate level)

Red line corresponds to 45 degree line. Blue line is best linear fit with 95 perc. confidence interval.

Bilateral versus aggregate regression estimatesReal-REER Demand Elasticities

deciding which elasticities to use. If forecasting is the main objective, then the model with the bestfit may be the preferred one. If the aim is to use the elasticities of the standard REER approach tocalibrate a macro-model, which relies on aggregate export equations to summarize trade linkagesbetween the different regions in the model, then the counterfactual predictions are inconsistent withthe “micro-level” foundations implied by structural gravity. In this case, the estimates obtained fromthe ideal-REER regression may be the preferred ones.

The pooled estimates in table 6 hide potential heterogeneity in the exchange rate elasticitiesacross countries. Spilimbergo and Vamvakidis (2003) (and many others later) documented this cross-country heterogeneity. We investigate this point further by running the bilateral and the aggregatereal exchange rate regressions on a country-per-country basis. We obtain country-specific exchangerate and demand elasticities to test whether they differ in a significant way.

Figure 4 plots the relationship between the elasticities obtained from bilateral and aggregate re-gressions based on the ideal-REER approach (panel a) as well as the standard REER approach à la

27

McGuirk (panel b). All four panels exhibit significant variation in elasticities across countries andthese results are smaller for elasticities estimated on the bilateral than on the aggregate level. Onepossible explanation is the limited number of observations. The aggregate country-specific regres-sions consist of a time-series analysis with 50 years of observations. In contrast, the bilateral variationconsists of up to 1200 observations (50 years multiplied by the number of trading partners). In theabsence of an aggregation bias, we would expect that the difference in the elasticities does not movein a particular direction, i.e., the difference between the elasticities should be more or less propor-tional to the size of the country-specific elasticities. In other words, the best linear fit between thetwo sets of elasticities should have a slope close to 1. For this reason, we include the best linear fit(in blue) with the 95 percent confidence interval as well as the 45 degree line (in red) into figure 4.Note that in all cases the estimated slope is lower than 1, which confirms the initial observation thatthe cross-country variation in the elasticities estimated on the bilateral level is smaller than thoseobtained from the aggregate level.

With respect to a potential aggregation bias, we expect that the ideal-REER approach will resultin smaller differences between the elasticities than the standard REER approach. Panels (a) and (b)in figure 4 show that this is indeed the case: the absolute difference between the point estimates ofthe elasticities obtained from bilateral trade flows and the ones obtained from aggregate trade flowsis smaller for the ideal-REER approach compared with the standard REER approach. Moreover,the difference is less biased in a particular direction, i.e., the best linear fit (in blue) of the ideal-REERestimates is closer to the 45 degree line (in red) than the best linear fit of the standard REER estimates.Taken together, the empirical results support our theoretical findings, namely that the difference inthe elasticities is related to the functional form assumption in the aggregation of bilateral trade flows.The ideal-REER approach aggregates the bilateral variation in accordance with the gravity model andreduces bias from the aggregation.

Before concluding, we consider an alternative pricing paradigm and estimate our empiricalspecifications in accordance with the PCP shown in equation 25. Table 7 shows the estimated co-efficients. The main difference with respect to the evidence based on DCP is that denominating thevariables in the producer’s currency worsens the estimation performance. Compared with table 6,the R2 and the point estimates of the elasticities are lower while the standard errors of the elastic-ities are higher in all specifications of table 7. With respect to the differences in elasticities acrossdifferent levels of aggregation, the ideal-REER elasticities are closest to the ones estimated on thebilateral level. All other specifications lead to significant differences in elasticities with respect to thebilateral level. Overall, these results suggest that currency denomination matters for the estimationperformance and the quantitative results but not for the qualitative results on the aggregation bias.

28

Table 7: Empirical results with variables denominated in the exporter’s currency (PCP)

Bilateral Aggregate

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5) (6)

Exchange ratePoint estimate -.461 -.384 -.289 -.567 -.243 -.181Std. error (0.039) (0.072) (0.057) (0.062) (0.082) (0.074)Foreign demandPoint estimate 1.132 1.102 .942 1.066 1.095 .979Std. error. (0.019) (0.106) (0.096) (0.048) (0.112) (0.072)

Observations 27940 1077 1077 1142 1077 1198R2 .157 .407 .497 .587 .489 .460

Notes: The sample consists of 25 countries over the period 1964-2014.

7 Conclusion

One reason why country-specific bilateral exchange rate and demand elasticities differ from aggre-gate elasticities is incorrect aggregation. The standard approach taken in the literature is based on functional form assumptions and an incorrect weighting scheme. A consequence of these assump-tions is that both the trade (exchange rate) and the demand elasticity are biased. However, our sim-ulations and the empirical evidence show that these biases are quantitatively small but statistically significant.

The fact that many macroeconomics models are calibrated with elasticities based on standard REER regressions has important policy implications. In particular, models calibrated with the elas-ticities estimated from aggregate data lead to inaccurate predictions by exaggerating the response of exports and, by extension, output following an exchange rate shock. Calibrating these models with elasticity estimates using our new ideal-REER regression specification with variables denominated in the dominant international currency (i.e., the US dollar) improve the model’s fit and results in predictions consistent with microeconomic behavior in bilateral trade equations.

29

References

AHMED, S., M. APPENDINO, AND M. RUTA (2016): “Global value chains and the exchange rateelasticity of exports,” The BE Journal of Macroeconomics, 17.

ALVAREZ, F. AND R. J. LUCAS (2007): “General equilibrium analysis of the Eaton Kortum model ofinternational trade,” Journal of Monetary Economics, 54(6), 1726–1768.

ANDERSON, J. E. AND E. VAN WINCOOP (2003): “Gravity with Gravitas: A Solution to the BorderPuzzle,” American Economic Review, 93.

ANDERSON, J. E., M. VESSELOVSKY, AND Y. V. YOTOV (2016): “Gravity with scale effects,” Journalof International Economics, 100, 174–193.

ARKOLAKIS, C., A. COSTINOT, AND A. RODRIGUEZ-CLARE (2012): “New trade models, same oldgains?” American Economic Review, 102, 94–130.

ARMINGTON, P. S. (1969): “A Theory of Demand for Products Distinguished by Place of Produc-tion,” IMF Staff Papers, 159–178.

ARTUS, J. R. AND A. K. MCGUIRK (1981): “A Revised Version of the Multilateral Exchange RateModel,” IMF Staff Papers, 28, 275–309.

BARNETT, R., K. B. CHARBONNEAU, AND G. POULIN-BELLISLE (2016): “A New Measure of theCanadian Effective Exchange Rate,” Discussion Papers 16-1, Bank of Canada.

BAYOUMI, T., J. LEE, AND S. JAYANTHI (2005): “New rates from new weights,” IMF Working Paper.

BAYOUMI, T., M. SAITO, AND J. TURUNEN (2013): “Measuring Competitiveness: Trade in Goods orTasks?” IMF Working Papers.

BEMS, R. AND R. C. JOHNSON (2017): “Demand for value added and value-added exchange rates,”American Economic Journal: Macroeconomics, 9, 45–90.

BENNETT, H. Z. AND Z. ZARNIC (2009): “International Competitiveness of the Mediterranean Quar-tet: A Heterogeneous-Product Approach,” IMF Staff Papers, 56, 919–957.

BOZ, E., G. GOPINATH, AND M. PLAGBORG-MØLLER (2017): “Global trade and the dollar,” Tech.rep., National Bureau of Economic Research.

BUSSIÈRE, M., G. CALLEGARI, F. GHIRONI, G. SESTIERI, AND N. YAMANO (2014a): “Estimatingtrade elasticities: Demand composition and the trade collapse of 2008-09,” American Economic Jour-nal: Macroeconomics, 5, 118–51.

30

BUSSIÈRE, M., S. DELLE CHIAIE, AND T. A. PELTONEN (2014b): “Exchange Rate Pass-Through inthe Global Economy: The Role of Emerging Market Economies,” IMF Economic Review, 62, 146–178.

BUSSIÈRE, M., G. GAULIER, AND W. STEINGRESS (2016): “Global Trade Flows: Revisiting the Ex-change Rate Elasticities,” Working papers 608, Banque de France.

CAMPA, J. M. AND L. S. GOLDBERG (2005): “Exchange rate pass-through into import prices,” TheReview of Economics and Statistics, 87, 679–690.

CASAS, C., F. DIEZ, G. GOPINATH, AND P.-O. GOURINCHAS (2017): “Dominant CurrencyParadigm: A New Model for Small Open Economies,” IMF Working Papers 17/264, InternationalMonetary Fund.

CHINN, M. D. (2006): “A primer on real effective exchange rates: determinants, overvaluation, tradeflows and competitive devaluation,” Open Economies Review, 17, 115–143.

COSTINOT, A. AND A. RODRÍGUEZ-CLARE (2014): “Trade theory with numbers: Quantifying theconsequences of globalization,” in Handbook of International Economics, Elsevier, vol. 4, 197–261.

DEKLE, R., J. EATON, AND S. KORTUM (2007): “Unbalanced Trade,” American Economic Review, 97,351–355.

DI MAURO, F. AND M. H. PESARAN (2013): The GVAR handbook: Structure and applications of a macromodel of the global economy for policy analysis, Oxford University Press.

EATON, J. AND S. KORTUM (2002): “Technology, Geography, and Trade,” Econometrica, 70(5), 1741–1779.

FOUQUIN, M. AND J. HUGOT (2016): “Two Centuries of Bilateral Trade and Gravity Data: 1827-2014,” Working Papers 2016-14, CEPII.

FREUND, C. AND M. D. PIEROLA (2012): “Export surges,” Journal of Development Economics, 97, 387–395.

GOLDSTEIN, M., M. S. KHAN, ET AL. (1985): “Income and price effects in foreign trade,” Handbookof International Economics, 2, 1041–1105.

HEAD, K. AND T. MAYER (2014): “Gravity Equations: Workhorse, Toolkit, and Cookbook,” Handbookof International Economics, 4.

HOUTHAKKER, H. S. AND S. P. MAGEE (1969): “Income and price elasticities in world trade,” TheReview of Economics and Statistics, 111–125.

IMBS, J. M. AND I. MÉJEAN (2015): “Elasticity optimism,” American Economic Journal: Macroeconomics,5, 43–83.

31

JAKAB, Z., P. LUKYANTSAU, AND S. WANG (2015): “A Global Projection Model for Euro Area LargeEconomies,” IMF Working Papers.

KLAU, M. AND S. S. FUNG (2006): “The new BIS effective exchange rate indices,” BIS QuarterlyReview, March.

LANE, P. R. AND G. M. MILESI-FERRETTI (2012): “External adjustment and the global crisis,” Journalof International Economics, 88, 252–265.

MCGUIRK, A. (1986): “Measuring price competitiveness for industrial country trade in manufac-tures,” IMF Working Paper, 87.

OBSTFELD, M. AND K. S. ROGOFF (2005): “Global current account imbalances and exchange rateadjustments,” Brookings Papers on Economic Activity, 2005, 67–123.

ORCUTT, G. H. (1950): “Measurement of price elasticities in international trade,” The Review of Eco-nomics and Statistics, 117–132.

PATEL, N., Z. WANG, AND S.-J. WEI (2017): “Global value chains and effective exchange rates at thecountry-sector level,” BIS Working Papers 637, Bank for International Settlements.

SCHMITZ, M., M. DE CLERCQ, M. FIDORA, B. LAURO, AND C. PINHEIRO (2011): “Revisting theEffective Exchange Rates of the Euro,” ECB Occasional paper.

SIMONOVSKA, I. AND M. E. WAUGH (2014): “The elasticity of trade: Estimates and evidence,” Jour-nal of International Economics, 92, 34–50.

SPILIMBERGO, A. AND A. VAMVAKIDIS (2003): “Real effective exchange rate and the constant elas-ticity of substitution assumption,” Journal of International Economics, 60, 337–354.

VIGFUSSON, R. J., N. SHEETS, AND J. GAGNON (2009): “Exchange Rate Passthrough to ExportPrices: Assessing Cross-Country Evidence,” Review of International Economics, 17, 17–33.

32

8 Appendix

8.1 Simulation results for alternative values of θ

Table 8: GETI simulation elasticities of country-specific random exchange rate shocks, stochastic trade costsand θ = 0.8

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5)

Exchange rateMean -.8 -.757 -.788 -.787 -.781Bias 0 .043 .012 .013 .019Std dev. 0 .101 .126 .124 .132MSE 1/2 0 .109 .127 .125 .133

Foreign demandMean 1 .795 1.092 1.085 1.127Bias 0 .205 .092 .085 .127Std dev. 0 .283 .182 .191 .201MSE 1/2 0 .350 .203 .209 .237

Notes: The sample consists of 39 countries and each country receives 100 random exchange rate and trade cost shocks.The total number of estimated exchange rate and demand elasticities is 3900 for each of the 5 different specifications.The top cell labeled "Mean" reports the sample mean of the respective estimates for each type of elasticity. The rowslabeled "Bias" give the estimated bias, where est. bias = sample mean - true value. Rows labeled "Std Dev." give thesample standard deviation of the 3900 point estimates. Rows labeled "MSE1/2" give the square root of the estimatedmean squared error (MSE), where estimated MSE = (est. bias)2 + (std dev)2.

33

8.2 Simulation results for producer currency pricing

Table 9: GETI simulation elasticities of country-specific random exchange rate shocks in producer currencypricing (PCP) and stochastic trade costs

Baseline GM mistake REER McGuirk d ln approx. Alternative("ideal-REER") ("real-REER") weights

(1) (2) (3) (4) (5)

Exchange rateMean -4 -3.891 -4.029 -4.032 -3.967Bias 0 .119 .029 .032 .033Std dev. 0 .143 .176 .185 .179MSE 1/2 0 .186 .178 .187 .182

Foreign demandMean 1 1.26 1.112 1.101 1.224Bias 0 .26 .112 .101 .224Std dev. 0 .291 .243 .256 .344MSE 1/2 0 .390 .267 .275 .411

Notes: The sample consists of 39 countries and each country receives 100 random exchange rate and trade cost shocks.The total number of estimated exchange rate and demand elasticities is 3900 for each of the 5 different specifications.The top cell labeled "Mean" reports the sample mean of the respective estimates for each type of elasticity. The rowslabeled "Bias" give the estimated bias, where est. bias = sample mean - true value. Rows labeled "Std Dev." give thesample standard deviation of the 3900 point estimates. Rows labeled "MSE1/2" give the square root of the estimatedmean squared error (MSE), where estimated MSE = (est. bias)2 + (std dev)2.

34

8.3 Derivations for McGuirk (1986)

Consider the CES price index in country n:

Pn =

(K

∑k=1

P1−σnk

) 11−σ

, (26)

where σ is the elasticity of substitution. Note that by the CES demand, the export price of country kin destination n can be written as follows:

P1−σnk = (PnkXnk)

P−σn

Xn(27)

Next, we can replace the export price in the sum

P1−σn =

(K

∑k=1

(PnkXnk)P−σ

nXn

)and simplify to

Pn =K

∑k=1

PnkXnkXn

.

Taking the total derivative implies

dPn

Pn=

K

∑k=1

PnkXnkXnPn

dPnkPnk

+K

∑k=1

PnkXnkXnPn

d(

XnkXn

)XnkXn

,

where the second term is a weighted average of percentage changes in market shares and equalszero. Noting that the term PnkXnk

XnPnreflects the import shares πnk , we get

dPn

Pn=

K

∑k=1

πnkdPnkPnk

.

If we consider a log change, we get

4 ln Pn =K

∑k=1

πnk4 ln Pnk,

where the change in price index is a weighted geometric average of the export price changes.19 Now,we replace the import price index in the bilateral export equation 9 by the sum of the bilateral prices

19Instead of the approximation of the price index, we can calculate the exact change in the price index by using the hatnotation. Simply, consider equation 26 with the new prices after the policy change (P′n and P′kn) and divide both sides byPn. Using the fact that the relative prices equal the import expenditure share (πnk = P1−σ

kn /P1−σn , see equation 27), we

obtain the exact price change (ln P1−σn = ln ∑K

k=1 πnk P1−σnk ).

35

and get

4 ln Xni = 4 ln Xn − θ

(4 ln Pni −

K

∑k=1

πnk4 ln Pnk

).

Note that ∑Kk=1 πnk = 1, thus the equation simplifies to

4 ln Xni = 4 ln Xn − θ

((1− πni)4 ln Pni −∑

k 6=iπnk4 ln Pnk

)

and noting again that ∑k 6=i πnk = (1− πni), we get the following bilateral equation:

4 ln Xni = 4 ln Xn − θ ∑k 6=i

πnk4 ln(

Pni

Pnk

).

Using the fact that the change in the bilateral price index equals the change in producer pricesdenominated in producer currency times the exchange rate, 4 ln Pni = 4 ln riPii and 4 ln Pnk =

4 ln rkPkk, we can aggregate across all importing countries and obtain the double-weighted exchangerate:

∑n 6=i

ωni4 ln Xni = −θ ∑n 6=i

ωni ∑k 6=i

πnk4 ln(

ri

rk

Pii

Pkk

)+ ∑

n 6=iωni4 ln Xn

Or, as outlined in the text, in hat notation (using4 ln x = ln x):

∑n 6=i

ωni ln Xni = −θ ∑n 6=i

ωni ∑k 6=i

πnk ln(

ri

rk

Pii

Pkk

)+ ∑

n 6=iωni ln Xn

8.4 Derivation of alternative weights

Consider the correct REER equation 11. Bayoumi et al. (2005) start from this definition but includethe domestic market share of the exporter i and assumes that the change in the export price is pro-portional to the change in the producer index (i.e., Pni ∝ Pii ), i.e.,

ln ˆREERi =N

∑n=1

∑k 6=i

ψniπnk ln(

Pii

Pkk

). (28)

So their weights are defined as

Wki =N

∑n=1

ψniπnk.

To derive the IMF weights, start from equation 28:

36

ln ˆREERi =N

∑n=1

∑k 6=i

ψniπnk ln(

Pii

Pkk

)Note that we can get ln Pi out of the sum by ∑N

n=1 ψni ∑k 6=i πnk = ∑Nn=1 ψni(1 − πni) = 1 −

∑Nn=1 ψniπni:

ln ˆREERi = (1−N

∑n=1

ψniπni) ln(

Pii)−∑

k 6=i

N

∑n=1

ψniπnk ln(

Pkk)

,

which can be rewritten as

ln ˆREERi = ln(

Pii)−

N

∑k=1

N

∑n=1

ψniπnk ln(

Pkk)

.

But note that these weights do not sum to one. To show this, start by

∑k 6=i

Wki =N

∑n=1

∑k 6=i

ψniπnk =N

∑n=1

ψni (1− πni)

since

∑k 6=i

πnk = (1− πni)

and hence we get something different from one:

∑k 6=i

Wki = 1−N

∑n=1

ψniπni

The term ∑Nn=1 ψni (1− πni) is exactly the normalizing factor of the IMF weights. Their weights

are defined as

Wki =∑N

n=1 ψniπnk

∑Nn=1 ψni (1− πni)

.

Note that they are wrong for export equations because they include the domestic market of theexporter in their weights. Also, they are re-normalized, which should not be the case.

8.5 Trade deficit

In the general equilibrium counterfactual we use a nominal exchange rate shock and the presence oftrade deficits to generate variation in income. In the absence of trade deficits a nominal exchange rateshock will be fully absorbed by the nominal wage of the numeraire country and the shock will not

37

have any real effects. When we introducing a trade deficit, the trade literature generally considersthe following two scenarios:20

1. Assume that it is a constant fraction of national GDP(

c = DiYi

)where Yi is national GDP.

2. Assume that it is a constant fraction of world GDP(

c = DiY

)where Y is world GDP.

The assumption that the deficit is a constant fraction of national GDP implies that a nominal exchangerate shock does not lead to any real effects. On the other hand, if the deficit is fixed in internationalcurrency the exchange rate shock will have real effects. The proof for this statement follows.

Using the structural gravity model outlined in the paper, we can define our model as follows:

Xni =1Y

YiXn

ΩiΦnφni, where Φn =

N

∑`=1

(Yi

Ωiφni

)and Ωi =

N

∑n=1

φniXn

Φn,

where Xni denotes the bilateral trade flows, Φn the outward and Ωi the inward multilateral resistanceterm. Introducing the bilateral exchange rate ri

rnwe can rewrite the equations of structural gravity as

follows:

πni =Siφni

Φn, where φni =

(ri

rnτni

)−θ

, Φn = (Pn)−θ = ∑

iSiφni and Si = Ti

(wβ

i p1−βi

)−θ

Let’s start by rewriting the bilateral export equation:

XniYYiXn

=φni

ΩiΦn(29)

and the multilateral resistance terms as

Φn =N

∑i=1

(Yi

Ωiφni

)and Ωi =

N

∑n=1

φniXn

Φn.

Plugging in the exchange rate and trade costs for φni and simplifying, we get:

Φnr−θn =

N

∑i=1

(Yi

Ωi(riτni)

−θ)

and Ωirθi =

N

∑n=1

(r−1

n τni

)−θ Xn

Φn.

To solve the system of equations, define the shock to the bilateral exchange rate as a function ofthe initial values for the multilateral resistance terms:(

ri

rn

)−θ

=(

Ω0i Φ0

n

)20See the Handbook of International Economics chapter by Costinot and Rodríguez-Clare (2014).

38

Plugging the exchange rate shocks into the multilateral resistance terms shows that the RHS ofequation 29 does not vary with the exchange rate shock and cancels out in the numerator and thedenominator:

φni

ΩiΦn=

(Ω0

i Φ0n)(τni)

−θ

ΩiΦnΦ0

nΩ0i

=(τni)

−θ

ΩiΦn

To complete the proof, we have to show that the LHS of equation 29 is also invariant to exchangerate changes. We start by writing total expenditure Xn as a function of output Yn and the trade deficitDn:

XniYYiXn

=XniY

YiYn + Dn

If the deficit is a constant fraction of GDP, we can write

rnXniriY

rnYn

(1 + Dn

Yn

)riYi

=XniYYiXn

,

which is invariant to an exchange rate change. A nominal exchange rate shock does not have any realeffects. If, on the other hand, the deficit is fixed in international currency, we replace total expenditureXn as a function of output Yn and the trade deficit Dnas follows:

rnXniriY(rnYn +

DnY

)riYi

6= XniYYiXn

In this case the deficit does not change in proportion to the exchange rate shock and the LHS ofequation 29 is not invariant to exchange rate changes. A nominal exchange rate shock will have realeffects.

39