Working Paper – Same Same but Different: The Elasticities Approach with Unbalanced Trade
This working paper derives expressions to calculate the effect of an exchange rate depreciation on net exports when trade is unbalanced and there is incomplete pass-through. The conditions for an improvement differ, depending on whether the initial imbalance is denominated in domestic or foreign currency. Applying these conditions to a large set of countries, we find that irrespective of how the initial imbalance is denominated, the predicted sign of the effect of depreciation is the same for most countries, but not for all. We also show analytically that the predicted impact of a 1% currency depreciation on the trade balance measured in local currency will differ from its analogue measured in foreign currency (converted into local currency) by the magnitude of the initial trade imbalance.
Keywords: Exchange rate, trade balance, Marshall-Lerner condition