NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Regional Effects of Exchange Rate Fluctuations

Christopher L. House, Christian Proebsting, Linda L. Tesar

NBER Working Paper No. 26071
Issued in July 2019
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

We exploit differences across U.S. states in terms of their exposure to trade to study the effects of changes in the exchange rate on economic activity at the business cycle frequency. We find that a depreciation in the state-specific trade-weighted real exchange rate is associated with an increase in exports, a decline in unemployment and an increase in hours worked. The effect is particularly strong in periods of economic slack. We develop a multi-region model with inter-state trade and labor flows and calibrate it to match the state-level orientation of exports and the extent of labor migration and trade between states. The model replicates the relationship between exchange rates and unemployment. Counterfactuals show that the high degree of interstate trade plays a dominant role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in following years. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

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Document Object Identifier (DOI): 10.3386/w26071

 
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