Lnda S. Goldberg Industry-Spef Exhange Rates for the Unted States The effet of exhange rate movements on U.S. produers and U.S. eonom atvty has drawn renewed nterest lately followng the large delnes n the trade-weghted dollar. At the natonal level, analyses of exhange rate moves often rely on aggregate tradeweghted exhange rates. However, aggregate ndexes an be less effetve than ndustryspef ndexes n apturng hanges n ndustry ompettve ondtons ndued by moves n spef blateral exhange rates. To nform the dsussons of the urreny valuaton hanges nfluenng spef ndustres, ths artle onstruts three ndustry-spef real exhange rate ndexes for the Unted States and analyzes the extent to whh eah ndex o-moves or dverges from the aggregate eonomywde measures. The study shows how analyses that use aggregate exhange rate ndexes nstead of ndustry-spef ones mght not reognze the empral mportane of exhange rates for the produer profts of spef U.S. ndustres. R 1. Introduton eent sgnfant delnes n the trade-weghted U.S. dollar agan rase questons about what exhange rate flutuatons mean for U.S. produers and for U.S. eonom atvty more broadly. When the dollar depreates, the pres of goods mported nto the Unted States typally rse. 1 All else equal, suh exhange-rate-ndued mport pre nreases generally mprove the ompettveness of U.S. produers n manufaturng and nonmanufaturng ndustres relatve to that of foregn ompettors. Although some ndustres are made worse off by real dollar depreaton, perhaps due to ther net relane on mported produtve nputs, on average the profts of U.S. produers rse. At the natonal level, dsussons of exhange rate movements often rely on aggregate trade-weghted exhange rates, suh as the arefully onstruted measures omputed by the Board of Governors of the Federal Reserve System for the aggregate eonomy. 2 Those aggregate ndexes use weghtng shemes appled to trade-partner exhange rates; the weghts are based on all mports and exports of the entre U.S. eonomy. Suh ndexes are extremely useful at a maroeonom level for example, n dsussons of the relatonshps between exhange rates and the aggregate trade balane. Yet ths fous on natonal aggregates neessarly omts ndustry-spef dstntons onernng trade partners and ompetton. The mportane of partular ountres as Lnda S. Goldberg s a ve presdent at the Federal Reserve Bank of New York. <lnda.goldberg@ny.frb.org> The author thanks Robert Lpsey and two anonymous referees for onstrutve omments. Lus Gonzalez and Glenda Oskar provded valuable researh assstane. The vews expressed are those of the author and do not neessarly reflet the poston of the Federal Reserve Bank of New York or the Federal Reserve System. FRBNY Eonom Poly Revew / ay 2004 1
ompettors wthn an ndustry an dffer substantally from ther mportane n the aggregated trade of the Unted States. As a onsequene, aggregate trade-weghted ndexes may be less effetve than ndustry-spef real exhange rate ndexes n apturng hanges n ndustry ompettve ondtons ndued by movements n spef blateral exhange rates. In ths artle, we demonstrate how suh ndustry-spef real exhange rates an be onstruted and present the reent paths of these ndexes. We next present three bas real exhange rate measures for eah ndustry: one usng export partner weghts only, a seond usng mport partner weghts, and a thrd usng an average of export and mport weghts by ndustry. After we detal onstruton methods for these three ndustry-spef real exhange rates, we present dagnosts on the extent to whh eah onstrut o-moves or dverges from aggregate eonomywde measures. One bas and well-known observaton s that there s a large dvergene between U.S. exports and mports aross ountry trade partners. Compared wth the partners of U.S. exporters, U.S. mporters tend to purhase a larger share of goods from less developed ountres. Even wthn an ndustry, suh dfferenes mean that exportng produers may experene an exhange-rate-ndued hange n ompettve ondtons qute dfferent from that of U.S. produers fang mport ompetton or usng mported omponents n produton. 3 Dstntons aross ndustres are sometmes even larger, and spef blateral exhange rate hanges an trgger vastly dfferent pressures on produers n dfferent ndustres. All of these nstanes undersore the potental for ndustryspef exhange rates to follow dstnt paths. Those paths n turn depend on whether they are onstruted usng mport or export data. Throughout ths dsusson, our goal s to emphasze that movements n blateral exhange rates for example, between the dollar and the euro, the dollar and the yen, or the dollar and the Chnese yuan mean dfferent thngs to dfferent produers. Aordngly, the trade-weghted exhange rate seres approprate for a produer or an ndustry depends on the ndustry and the ssue under onsderaton. Ths dea s borne out by an analyss of the senstvty of orporate profts and exhange rates. A bas llustraton demonstrates how researhers mght fal to reognze the empral mportane of exhange rates for the produer profts of spef U.S. ndustres f ther analyses use aggregate exhange rate ndexes nstead of ndustry-spef ones. Suh qualtatve dfferenes are apparent when data on U.S. ndustres are dsaggregated broadly (at the two-dgt Standard Industral Classfaton [SIC] level), and would presumably be even more pronouned f trade-weghted exhange rates were onstruted at fner levels of ndustry dsaggregaton. Usng avalable data and onstruton methods, we observe that there an be a better mathng of exhange rate ndexes to ndustry-spef onerns. The lessons from our dsusson and the relevant exhange rate seres that we make avalable should thus enourage more wdespread and nformed analyss of the effets on U.S. ndustres of movements n the dollar s real value. 4 2. Aggregate Real Exhange Rate Indexes The Board of Governors of the Federal Reserve System onstruts a number of very useful and arefully devsed aggregate exhange rate ndexes that shed lght on the overall value of the U.S. dollar (<http://www.federalreserve.gov/ releases/h10/summary/>). Among these measures, we fous exlusvely on the real ndexes, meanng that exhange rates used n the alulatons are adjusted for aggregate pre nflaton n the markets of partner ountres. The Federal Reserve s Index of the Foregn Exhange Value of the Dollar (the broad ndex) s a weghted average of the foregn exhange values of the The Board of Governors of the Federal Reserve System onstruts a number of very useful and arefully devsed aggregate exhange rate ndexes that shed lght on the overall value of the U.S. dollar. U.S. dollar aganst the urrenes of a large group (approxmately thrty-fve) of major U.S. tradng partners. The ndex weghts hange over tme and are derved from U.S. export shares and U.S. mport shares. Two other real exhange rate seres onstruted by the Federal Reserve dffer from the broad ndex n terms of the tradng partners used. The major urrenes ndex reflets the value of the dollar aganst the urrenes of ountres n the euro area, Australa, Canada, Japan, Sweden, Swtzerland, and the Unted Kngdom. The other mportant tradng partners (OITP) ndex shows the dollar value aganst other urrenes that are not heavly traded outsde ther home markets. Chart 1 shows the reent paths of those ndexes. Although they do not yet address the mportant ssue of dfferent trade partners for dfferent U.S. ndustres, these alternatve aggregate seres from the Federal Reserve llustrate 2 Industry-Spef Exhange Rates for the Unted States
Index 140 Chart 1 Aggregate Real Exhange Rate Indexes 130 120 Other mportant tradng partners 110 100 90 80 ajor urrenes 70 1980 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Soure: Board of Governors of the Federal Reserve System, monthly data. the sgnfane of properly measurng the value of the dollar aganst alternatve tradng partners of the Unted States. Sne January 2000, the real broad and major urrenes ndexes have shown substantal movements n the value of the U.S. dollar. The broad ndex appreated by 12 perent through January 2002, then depreated by a umulatve 12 perent through February 2004. The major urrenes ndex, whh onentrates more on the ndustralzed ountres than the broad ndex does, showed more overall volatlty durng ths perod, appreatng by 18 perent before depreatng 22 perent overall. By ontrast, the dollar appreated aganst the urrenes n the OITP ndex through most of the perod. 3. Industry-Spef Real Exhange Rates Just as the dfferenes between ountry groups are mportant n omputng the weghts on urrenes used n these real exhange rate seres, the dstntons between partular ndustres are hghly revealng. As Table 1 shows, these dstntons arse beause ndustres have dfferent tradng partners, and beause the export destnatons of an ndustry an dffer dramatally from the mport soures of produts of that same ndustry. For example, the share of the euro area s 18 perent n U.S. overall mports, but 25 perent n mports of preson nstruments and 13 perent n mports of toys and sportng goods (msellaneous manufaturng). 5 By ontrast, whle Chna represents 11 perent of overall U.S. mports, t aounts for 9 perent of mports of preson nstruments and 38 perent of mports of toys and sportng goods. Beause of these dfferenes, we expet orrespondng urrenes and ther exhange rates relatve to the dollar to play dstnt roles n the relatve ompettve ondtons for dfferent U.S. ndustres. For U.S. manufaturers, ndustralzed ountres are often more mportant as export markets than as mport supplers. Generally, non-ol-produng developng ountres fgure more promnently as soures of U.S. mports than as destnatons for U.S. exports. Therefore, movements n a major urreny lke the euro generally have a stronger presene n U.S. exports than mports. As Table 1 shows, euro-area ountres aount for a large share of U.S. exports, and, wth the exepton of mahnery, a slghtly smaller share of U.S. mports n those ndustral ategores. For Japan and Chna, however, the omparsons between export markets and mport soure shares n these ndustres are far more dramat. An mport-ompetng produer, therefore, may assgn a hgher weght to the yen or yuan n ts relevant trade-weghted exhange rate ompared wth produers n nonompetng ndustres. Chart 2 also llustrates our general pont that some ndustralzed ountres (for example, the euro area, the Unted Kngdom, Canada, and Japan) have very dfferent representaton n the exports than n the mports of U.S. ndustres. Ths omparson of the 2001 shares of these FRBNY Eonom Poly Revew / ay 2004 3
Table 1 Country/Regon Shares n Trade by Industry U.S. Export Destnatons by Standard Industral Classfaton (SIC), 2001 SIC Number Euro Area Japan Chna Eletrons 36 13 8 3 Industral mahnery 35 20 8 4 Preson nstruments 38 28 15 3 Toys and sportng goods 39 20 10 1 Transportaton equpment 37 18 5 3 All U.S. exports 18 9 3 U.S. Soures of Imports by SIC, 2001 SIC Number Euro Area Japan Chna Eletrons 36 8 15 15 Industral mahnery 35 17 20 11 Preson nstruments 38 25 23 9 Toys and sportng goods 39 13 11 38 Transportaton equpment 37 19 23 1 All U.S. mports 18 13 11 U.S. Export Destnatons by North Ameran Industry Classfaton System (NAICS), 2002 NAICS Number Euro Area Japan Chna Computer and eletrons 334 17 8 4 ahnery 333 16 6 4 Eletral equpment 335 14 5 3 Toys and sportng goods 339 26 11 1 Transportaton equpment 336 18 6 3 All U.S. exports 17 8 3 U.S. Soures of Imports by NAICS, 2002 NAICS Number Euro Area Japan Chna Computer and eletrons 334 8 13 16 ahnery 333 27 23 8 Eletral equpment 335 12 9 27 Toys and sportng goods 339 15 7 35 Transportaton equpment 336 17 23 1 All U.S. mports 17 12 13 Soure: Author s alulatons. Note: Fgures for the euro area, Japan, and Chna are n perent. ountres/regons n U.S. exports (denoted by ) and n U.S. mports (denoted by ) shows that these ndustralzed ountres aount for 32 perent of total exports for eduaton, and up to 81 perent of U.S. exports for the flm setor. The orrespondng shares of these ountres as soures of U.S. mports range from 12 perent n apparel to 87 perent n repar serves. 3.1 Industry-Spef Exhange Rate Construton We an onstrut exhange rate measures that reflet these ndustry-by-ndustry dstntons by usng the tme hstores of the weghts of U.S. tradng partners n the exports and mports of eah U.S. ndustry. Eah ndustry s denoted by an ndex and eah ountry/trade partner of that ndustry by an ndex. The ndustry-spef real exhange rate ndexes depart from the aggregate ndexes n that the weghts of eah partner urreny (ountry ) are the shares of that partner n the U.S. exports or mports of that spef ndustry. In ontrast, aggregate ndexes use the weghts of eah trade-partner ountry n the total nternatonal trade atvty of the entre U.S. eonomy. We begn by onstrutng three real exhange rate measures by ndustry. They dffer prmarly n the hoe of weghts appled to blateral real exhange rates, rer t, wth respet to eah tradng partner. The formulas for these ndexes are provded n equatons 1-3: (1) Export-weghted: xer t = w t rer t, where w t t = -------------- (2) Import-weghted: mer t = w t rer t, where w t t = --------------- (3) Trade-weghted: ter t 5 t -------------- 5 t + --------------- = rer.,. t t t where rer t are the blateral real exhange rates of eah U.S. tradng partner. The blateral real exhange rates are onstruted by multplyng a ountry s nomnal exhange rate (loal urreny per dollar) by the rato of the onsumer pre ndexes of the Unted States aganst that partner ountry. 6 For any ndustry ndexed by, these onstrutons defne the export real exhange rate xer t, the mport real exhange rate mer t, and the trade-average real exhange rate ter t, wth eah onstruton usng ndustry-spef and tme-varyng trade weghts. 7 An nrease n the value of any ndex mples a real appreaton of the U.S. dollar n trade-weghted terms. Our onstruton method for eah ndustry has the flavor of the method used n the Board of Governors broad ndex. 8 Instead of alulatng that sngle aggregate measure, however, we ompute separate seres for eah of the twenty two-dgt manufaturng and t t 4 Industry-Spef Exhange Rates for the Unted States
Chart 2 Seleted Industralzed Country Weghts n U.S. Exports and Imports Perent 100 90 80 70 60 50 40 30 20 10 0 20 21 22 23 24 25 26 27 28 = U.S. exports 29 30 31 32 = U.S. mports 33 34 35 Industry 36 37 38 39 Bus Fl Edu Con Fn Tel Rep PaF Leg Ins 20 Food and kndred produts 21 Tobao manufatures 22 Textle mll produts 23 Apparel and related produts 24 Lumber and wood produts 25 Furnture and fxtures 26 Paper and alled produts 27 Prntng and publshng 28 Chemals and alled produts 29 Petroleum refnng 30 Rubber and plast produts 31 Leather and leather produts 32 Stone, lay, glass, and onrete produts 33 Prmary metal produts 34 Fabrated metal produts 35 ahnery, exludng eletral 36 Eletral and eletron 37 Transportaton equpment 38 Sentf nstruments 39 sellaneous manufatures Bus Con Edu Fl Fn Ins Leg PaF Rep Tel Advertsng and omputer data Construton, engneerng, mnng Eduatonal serves Flm and tape rental Fnanal serves Net nsurane Legal serves Passenger fares Installaton, mantenane, repar Teleommunatons Soure: Author s alulatons. Notes: The onstruted shares dept the ombned weght n the 2001 trade of spef U.S. ndustres wth European Unon ountres, the Unted Kngdom, Canada, and Japan. The manufaturng ndustres are lsted by number and follow Standard Industral Classfaton desgnatons; nonmanufaturng ndustres are dentfed by letter odes. Where only s vsble, exports are equal or nearly equal to mports. ten nonmanufaturng U.S. ndustres (Appendx Table A1 provdes the omplete ndustry lst). The ountres ndexed by n equatons 1-3 total up to thrty-four trade partners of the Unted States n manufaturng ndustres and up to twenty-nne trade partners n nonmanufaturng ndustres. 9 4. Do Industry-Spef and Aggregate Real Exhange Rate Indexes Trak Eah Other? Beause the export and mport partners of spef ndustres an dffer substantally, the weghts of partner urrenes n the ndustry exhange rates vary orrespondngly. These dstntons are apparent both aross ndustres and over tme as the mportane of dfferent partner-ountry urrenes grows or shrnks. Our bas orrelaton analyss learly shows that varous ndustry-spef exhange rates and the aggregate broad ndex are hghly postvely orrelated. Table 2 presents four sets of orrelatons, wth eah fgure n a olumn showng the number of ndustres n the orrelaton range depted n that row. Compared wth mport exhange rates, the export exhange rate seres are more hghly orrelated wth the broad ndex. These orrelatons exeed 0.90 for fve of the thrty ndustres and exeed 0.80 for an addtonal seventeen ndustres. Aross all of the manufaturng and nonmanufaturng ndustres, roughly a thrd have orrelatons wth the broad exhange measure that are below 0.8. The ndustry exhange rate, ter, onstruted usng both export and mport shares n partner weghts, traks the broad seres more losely than do the ndexes that use ether export or mport weghts alone. Although orrelatons greater than 0.80 aross the exhange rate ndexes an be onstrued as strong, the perod-to-perod perentage hanges n ndustry-spef and aggregate exhange FRBNY Eonom Poly Revew / ay 2004 5
Table 2 Correlatons between Alternatve Industry Exhange Rate Seres easured Contemporaneous Correlatons (orr) Number of Industres n Eah Correlaton Groupng Out of Thrty Industres xer wth (1) mer wth (2) xer wth mer (3) ter wth (4) orr 0.90 5 6 10 9 0.90 > orr 0.80 17 14 5 15 0.80 > orr 0.70 4 7 7 6 0.70 > orr 4 3 8 0 Soure: Author s alulatons. Notes: SIC s Standard Industral Classfaton; NAICS s North Ameran Industry Classfaton System. The four data olumns report the number of ndustres n any sze range of orrelatons between: (1) an ndustry s export exhange rate and the broad ndex, (2) an ndustry s mport exhange rate and the broad ndex, (3) an ndustry s export exhange rate and ts mport exhange rate, (4) an ndustry s trade-weghted exhange rate and the broad ndex. Correlatons use quarterly data. anufaturng uses SIC trade data for 1973-96 and NAICS trade data for 1997-2002. Nonmanufaturng data span 1986-2002. rates an dffer substantally. To llustrate ths pont, n Table 3 we provde real exhange rate movements sne January 2002 usng the same subset of ndustres that we presented n Table 1. Reall that the aggregate broad ndex peaked n early 2002, markng the end of a prolonged trade-weghted appreaton of the U.S. dollar. Over the reent perod, we observe that preson nstruments and transportaton equpment ndustres have export and mport exhange rates that have depreated more than the broad ndex, wth eah showng a 10 to 11 perent trade-weghted dollar depreaton sne 2002:1. However, the movements n the exhange rates for the omputer and eletrons ndustres have regstered a smaller real dollar depreaton than the broad measure dd durng ths perod. Ths result may our beause the euro area (and the euro) represents a smaller weght n the trade of the omputer and eletrons ndustres ompared wth ts weght n the preson nstruments and transportaton equpment ategores. In the ase of many mport-weghted seres and even exports of eletrons, ndustral mahnery, and toys and sportng goods (msellaneous manufaturng), the broad ndex an greatly msrepresent the apparent hange n urreny valuaton. Addtonal nformaton on the extent of o-movements of dfferent exhange rate measures avalable for eah ndustry s provded n Appendx Tables A1 and A2. In Table A1, we show the orrelatons between quarterly data for the broad ndex and Table 3 Perentage Change n Real Trade-Weghted Exhange Rate from 2002:1 Panel A: To 2003:4, Usng SIC Classfatons Industry xer mer ter Index Eletrons -8-6 -7-11 Industral mahnery -13-10 -11-11 Preson nstruments -15-13 -14-11 Toys and sportng goods -14-7 -10-11 Transportaton equpment -14-15 -15-11 Panel B: To 2003:4, Usng NAICS Classfatons Industry xer mer ter Index Computer and eletrons -9-5 -7-11 ahnery -12-15 -14-11 Eletral equpment -10-6 -8-11 Toys and sportng goods -15-8 -11-11 Transportaton equpment -15-14 -15-11 Soure: Author s alulatons, quarterly data. Notes: In panel A, trade weghts by Standard Industral Classfaton (SIC) desgnatons for alulatng ndustry-spef exhange rates were only avalable to 2001, so these 2001 weghts were assumed n alulatng 2002 and 2003 ndustry-spef exhange rates. In panel B, trade weghts by North Ameran Industry Classfaton System (NAICS) desgnatons for alulatng ndustry-spef exhange rates were only avalable to 2002, so these 2002 weghts were assumed n alulatng 2002 and 2003 ndustry-spef exhange rates. xer, mer, and ter for eah ndustry from 1973 to 2002. In Table A2, we report the perentage of perods n whh any two alternatve measures move n the same dreton over eah quarter, wth both measures ontemporaneously appreatng or depreatng. The broad real exhange rate measure and the xer measures tend to o-move more strongly than the broad measure and mer exhange rates. 4.1 An Applaton to Corporate Proft Data We fnd the advantage of usng ndustry-spef onstruts mmedately apparent when analyzng the relatonshps between U.S. produer profts and exhange rates. The data on orporate profts, ompled by the Bureau of Eonom Analyss, over the perod from 1970:1 to 2003:2 and nlude eght manufaturng ndustres, plus sx nonmanufaturng ndustres. 10 We onvert these proft aggregates nto real values by deflatng by the seasonally adjusted U.S. onsumer pre ndex and run regresson spefatons of the form 6 Industry-Spef Exhange Rates for the Unted States
(4) CorporateProfts t = α + β 0 realexhangerate + β 0, 1 Trade t realexhangerate t + β 1 GDP t + β 2 rnt t + ε t, where refers to a hange n logarthms of all varables exept for nterest rates (hange n levels), and all varables are represented n real terms. The regressons ntrodue ontrols for the effets of the busness yle (real GDP) and real nterest rates (rnt t, ten-year bonds) and use alternatve real exhange rates ( xer t, mer t, ter t, or t ), all defned as foregn urreny per dollar so that an upward movement s a real dollar appreaton. In some regresson spefatons, we ntrodue only the nonnterated exhange rate term. In other spefatons, we add an exhange rate term nterated wth the overall level of trade exposure of an ndustry, Trade t. Ths varable s a slower movng (annual) seres onstruted as the total trade (exports plus mports) of a spef broad ndustry relatve to that ndustry s annual shpments or output. 11 We also had some regresson spefatons that exluded the nonnterated exhange rate term, but nluded the exhange rate term nterated wth Trade t. When the multplatve varable Trade t s exluded from the regresson, the exhange rate term pks up the effets on profts of hanges over tme n the omposton of an ndustry s trade partners (exept n the broad measure) and the relatve values of ther urrenes. By nludng the Trade t varable, we also apture hanges over We fnd the advantage of usng ndustryspef onstruts mmedately apparent when analyzng the relatonshps between U.S. produer profts and exhange rates. tme n an ndustry s overall level of exposure to nternatonal trade. The latter term permts the nfluene of exhange rates on profts to grow as the overall role of trade grows relatve to an ndustry s shpments. In the full sample of fourteen ndustres for whh we have the BEA orporate proft data, a dollar depreaton on average rases U.S. orporate profts, but ths average effet s nosy and generally not statstally dfferent from zero. Table 4 provdes the results of tme-seres panel regressons run usng data for the subset of ndustres wth the hghest degree of nternatonal trade orentaton. We report the regresson results for spefatons where the trade varable s nterated wth the exhange rate (the β 0 realexhangerate t s exluded) and t Table 4 Corporate Profts and Exhange Rates for Hgh-Trade-Exposure Industres Category xer mer ter Index Constant -0.037*** (0.008) Trade real -1.428* exhange rate (0.783) real GDP 3.520*** (0.742) real nterest rate 0.020* (0.011) -0.037*** (0.008) -1.198* (0.627) 3.431*** (0.742) 0.021* (0.011) -0.037*** (0.008) -1.387* (0.717) 3.468*** (0.742) 0.021* (0.011) -0.038*** (0.008) -0.539 (0.569) 3.502*** (0.743) 0.018* (0.011) Adjusted R 2 0.047 0.048 0.048 0.043 Degrees of freedom 624 624 624 624 Soure: Author s alulatons. Note: Standard errors are n parentheses. * Statstally sgnfant at the 10 perent level. ** Statstally sgnfant at the 5 perent level. *** Statstally sgnfant at the 1 perent level. where we have a pooled tme-seres panel of ndustres. The regresson oeffents reported n Table 4 should be vewed as the average aross the nluded ndustres. In these fve hgh-trade-orentaton ndustres, the broad exhange rate measure s statstally nsgnfant n the regressons: a dollar appreaton on average lowers the profts of U.S. orporatons, but ths effet remans nosy and statstally nsgnfant. By ontrast, the ndustry-spef exhange rates are all statstally sgnfant. Thus, the proft effets of dollar movements are more presely dentfed: dollar appreatons (depreatons) redue (stmulate) orporate profts. Typal of ndustry orporate proft regressons, the majorty of movements n orporate profts are unexplaned by these broad maroeonom varables. Nonetheless, our ndustry-spef exhange rates play a statstally sgnfant and noteworthy role. Stll more ponted results are obtaned from our analyss of spef ndustres. Table 5 presents the results of ndustry-byndustry orporate proft regressons for varous manufaturng ndustres. We report results from regressons that omt the exhange rate term and use only the exhange rate term nterated wth ndustry trade orentaton: the most pronouned effets of exhange rates on spef ndustres generally are evdent n regressons that allow for hanges over tme n ndustry exposure to nternatonal trade. Those results FRBNY Eonom Poly Revew / ay 2004 7
Table 5 Corporate Profts and Exhange Rates: Hgh-Trade-Orented anufaturng Industres Chemal and Alled Produts Prmary etal Produts Noneletral ahnery Eletral ahnery and Eletrons Transportaton Equpment Category mer Index mer Index mer Index mer Index mer Index Constant -0.020** -0.020** -0.039*** -0.038*** -0.042*** -0.043*** -0.025* -0.026* -0.059* -0.061* (0.010) (0.010) (0.011) (-1.119) (0.014) -(0.014) (0.013) (0.013) (0.033) (0.033) Trade real exhange rate 0.570-0.598 1.316-1.119-1.50* -0.976-1.477* -1.034-2.016 1.020 (1.236) (1.281) (1.445) (1.196) (0.871) (0.809) (0.759) (0.695) (2.553) (2.200) real GDP 1.573* 1.570* 3.443*** 3.354*** 3.768*** 3.880*** 2.331* 2.468** 6.087** 6.252** (0.895) (0.895) (1.002) (0.998) (1.268) (1.274) (1.197) (1.203) (2.997) (2.995) real nterest rate 0.012 0.014-0.001 0.002 0.011 0.006 0.005 0.004 0.074 0.065 (0.013) (0.013) (0.015) (0.015) (0.019) (0.019) (0.017) (0.018) (0.074) (0.044) Adjusted R 2 0.021 0.021 0.075 0.075 0.078 0.0661 0.042 0.030 0.049 0.045 Degrees of freedom 124 124 124 124 124 124 124 124 124 124 2001 SIC trade share (perent) 0.33 0.34 0.63 0.75 0.58 Soure: Author s alulatons. Notes: Standard errors are n parentheses. SIC s Standard Industral Classfaton. * Statstally sgnfant at the 10 perent level. ** Statstally sgnfant at the 5 perent level. *** Statstally sgnfant at the 1 perent level. suggest that the strong relatonshp between mport exhange rates and the profts of spef ndustres wth hgh trade exposures may have been drven by the noneletral mahnery, eletral mahnery, and eletrons ndustres. Spefally, we note that some analysts may be onerned wth underlyng trends n real exhange rates nstead of perod-toperod urrent values, and may prefer to use exhange rate movements deomposed nto permanent (trend) and transtory elements. 5. Other Consderatons n Construtng Industry-Spef Real Exhange Rates Although we have provded three spef measures of ndustry-spef exhange rates, alternatve onstrutons of exhange rate ndexes may be more useful for answerng other questons. In ths seton, we dsuss some relevant ssues. Frst, we onsder the possblty that our ndex onstruton may be orrupted by ontemporaneous hanges n the trade orentaton or partner weghts of an ndustry as ndued by exhange rate hanges. If so, t may be approprate to onsder alternatve datng shemes on the weghts used n exhange rate onstruton. Seond, we address the type of blateral exhange rate that s most approprate to use wth equatons 1-3. 5.1 Endogenety of Trade Weghts Equatons 1-3 use ontemporaneous weghts, meanng that eah alulaton of an ndustry-spef exhange rate employs the pattern of trade partners that s n plae durng that same perod of tme (for that year, for that ndustry). Contemporaneous trade weghts have the advantage of provdng the most urrent nformaton on real hanges n urreny values that would be useful n makng future produton and revenue desons. One vald onern, however, s whether today s exhange rate movements affet today s trade patterns, so that usng weghts ontemporaneous to the exhange rate movement may ntrodue undesrable smultanety bases n the data. In other words, both the left-hand-sde and rght- 8 Industry-Spef Exhange Rates for the Unted States
hand-sde varables n a regresson may move together as a result of reatons to some other varable. Ths objeton s theoretally vald f the urrent trade-partner weghts are endogenous to urrent exhange rates. For U.S. ndustres, we observe onsderable stablty and persstene n trade-partner share weghts n annual data. We nonetheless turn to the data to determne how well ths observaton s supported aross ndustres. 12 We ondut two suggestve exerses. Frst, we orrelate ndustry-spef exhange rates onstruted wth ontemporaneous trade weghts wth ones onstruted usng one-year lagged trade shares as weghts on the ontemporaneous blateral exhange rates of the thrty-four tradng partners of the Unted States. Seond, we onstrut a trade-weghtng sheme that uses a three-year movng average of the shares of eah ountry partner n an ndustry s nternatonal trade. In ths measure, export exhange rates for an ndustry are onstruted as T = t 1 (5) xer t = w t rer t, where w t = -------------------------------. We regress the ndustry exhange rates onstruted usng ontemporaneous trade weghts aganst ndustry exhange rates onstruted usng the two alternatve weghtng shemes. ost of the year-on-year varablty n ndustry-spef exhange rates results from flutuatons n the omponent blateral real exhange rates. Aordngly, Table 6 suggests that suh small hanges n weghtng have very lttle effet on the fnal real exhange rate seres for eah ndustry. Contemporaneous and lagged onstrutons of ndustry-spef t 3 t 3 T = t 1 T T Table 6 Correlatons between Contemporaneous and Lagged Trade Weght Construts of Industry Exhange Rates easured Contemporaneous Correlatons (orr) Number of Industres n Eah Correlaton Groupng Out of Thrty Industres xer wth xler mer wth mler ter wth tler orr 0.98 25 21 24 0.98 > orr 0.95 2 3 3 0.95 > orr 3 6 3 Soure: Author s alulatons. Notes: xler s onstruted as n equaton 1, exept usng w t 1 n plae of w. Analogous onstruton methods are used for mler and tler t. exhange rates are hghly orrelated, typally n exess of 0.95. The data suggest margnally more potental for nstablty of trade-partner shares n mport exhange rates than n export exhange rates. 5.2 Permanent versus Transtory Changes n Exhange Rates Some analyses mght fous on ndustry adjustments when flutuatons n exhange rates are pereved as permanent (expeted to persst), as opposed to those pereved as transtory (expeted to reverse soon). In prng, employment, and nvestment desons, produers may make hoes that have a fxed-ost omponent only n response to the part of an exhange rate flutuaton expeted to persst. Produers would make other adjustments to more transtory flutuatons, as n the Campa and Goldberg (2001) fndng that overtme hours and earnngs n the Unted States are hghly senstve to the transtory omponent of the exhange rate. Permanent flutuatons, by ontrast, have a greater effet on regular employment and hours of U.S. workers. There are many tehnques avalable to deompose exhange rate movements nto transtory or permanent elements. The blateral exhange rates may pass through a flter that delvers a permanent omponent, rer, p t, or a transtory omponent. The relevant omponent s substtuted bak nto the exhange rate formulas of equatons 1-3 and weghted up usng the mport or export weghts, yeldng a varant suh as p, p, (6) xer t = w t rer t, where w t t = --------------. Note that ths onstruton onsders the permanent versus transtory omponents of the blateral exhange rates, but does not deompose trends n the underlyng trade weghts. 13 6. Conluson The ndustry-spef measures that we desrbe, although data-ntensve and umbersome to onstrut, enable us to take mportant steps forward n analyses of exhange rate effets on U.S. ndustres. Despte suh progress, these ndexes are not perfet ndators of hanges over tme n the ompettveness of U.S. produers relatve to foregn ompettors. Our measures do not adjust for ndustry-spef hanges n produtvty or the strateg prng atons attrbutable to t FRBNY Eonom Poly Revew / ay 2004 9
spef ndustres or partners. These measures also do not dretly trak hanges n the thrd-ountry ompettveness of U.S. produers for example, how the Unted States ompetes wth non-euro-area ompettors wthn the euro-area market. In addton, alternatve methods of onstrutng ndustryspef exhange rates are sometmes approprate for understandng the effets of exhange rate flutuatons on spef U.S. ndustres. 14 Our overall purpose has been to provde a range of onstruton methodologes and make avalable the underlyng data n order to promote more nformed dsussons of the urreny valuaton hanges nfluenng spef ndustres. Although other methods may also be useful to that end, our ontrbutons offer a number of onrete advanes n data avalablty and tools for analyzng the real and fnanal effets of exhange rate movements. 10 Industry-Spef Exhange Rates for the Unted States
Appendx Tables Table A1 Correlatons of Industry-Spef Exhange Rate easures Industry Code Industry Ttle xer RER mer RER xer mer ter RER 20 Food and kndred produts 0.917 0.827 0.833 0.904 21 Tobao manufatures 0.897 0.869 0.792 0.933 22 Textle mll produts 0.802 0.910 0.862 0.897 23 Apparel and related produts 0.647 0.885 0.743 0.821 24 Lumber and wood produts 0.734 0.557 0.336 0.793 25 Furnture and fxtures 0.564 0.817 0.784 0.723 26 Paper and alled produts 0.913 0.587 0.686 0.793 27 Prntng and publshng 0.782 0.909 0.792 0.895 28 Chemals and alled produts 0.907 0.929 0.953 0.930 29 Petroleum refnng 0.880 0.523 0.478 0.770 30 Rubber and plast produts 0.822 0.902 0.804 0.909 31 Leather and leather produts 0.868 0.900 0.868 0.915 32 Stone, lay, glass, and onrete produts 0.816 0.890 0.756 0.912 33 Prmary metal produts 0.886 0.876 0.920 0.899 34 Fabrated metal produts 0.773 0.853 0.638 0.901 35 ahnery, exludng eletral 0.878 0.875 0.782 0.928 36 Eletral and eletron 0.851 0.774 0.688 0.881 37 Transportaton equpment 0.802 0.836 0.695 0.890 38 Sentf nstruments 0.936 0.741 0.840 0.860 39 sellaneous manufatures 0.935 0.940 0.970 0.945 Bus Advertsng and omputer data 0.869 0.791 0.934 0.837 Con Construton, engneerng, mnng 0.623 0.745 0.472 0.787 Edu Eduatonal serves 0.840 0.770 0.723 0.870 Fl Flm and tape rental 0.857 0.831 0.952 0.853 Fn Fnanal serves 0.879 0.789 0.927 0.851 Ins Net nsurane 0.789 0.841 0.922 0.834 Leg Legal serves 0.878 0.875 0.989 0.879 PaF Passenger fares 0.854 0.879 0.970 0.874 Rep Installaton, mantenane, repar 0.822 0.825 0.944 0.835 Tel Teleommunatons 0.591 0.790 0.623 0.771 Soure: Author s alulatons. Notes: The manufaturng ndustres are lsted by number and follow Standard Industral Classfaton (SIC) desgnatons; nonmanufaturng ndustres are dentfed by letter odes. Correlatons use quarterly data. anufaturng uses SIC trade data for 1973-96 and North Ameran Industry Classfaton System trade data for 1997-2002. Nonmanufaturng data span 1986-2002. FRBNY Eonom Poly Revew / ay 2004 11
Appendx Tables (Contnued) Table A2 Co-ovement of Industry-Spef Exhange Rate easures Industry Code Industry Ttle xer RER mer RER xer mer ter RER 20 Food and kndred produts 0.924 0.790 0.765 0.874 21 Tobao manufatures 0.899 0.756 0.756 0.874 22 Textle mll produts 0.765 0.849 0.765 0.824 23 Apparel and related produts 0.731 0.714 0.664 0.782 24 Lumber and wood produts 0.891 0.672 0.647 0.874 25 Furnture and fxtures 0.672 0.731 0.790 0.731 26 Paper and alled produts 0.866 0.697 0.714 0.798 27 Prntng and publshng 0.765 0.874 0.807 0.857 28 Chemals and alled produts 0.874 0.874 0.899 0.874 29 Petroleum refnng 0.790 0.739 0.731 0.798 30 Rubber and plast produts 0.739 0.916 0.723 0.849 31 Leather and leather produts 0.798 0.706 0.639 0.824 32 Stone, lay, glass, and onrete produts 0.807 0.857 0.815 0.874 33 Prmary metal produts 0.824 0.840 0.832 0.832 34 Fabrated metal produts 0.706 0.908 0.731 0.840 35 ahnery, exludng eletral 0.874 0.924 0.832 0.950 36 Eletral and eletron 0.840 0.874 0.815 0.899 37 Transportaton equpment 0.773 0.899 0.807 0.891 38 Sentf nstruments 0.874 0.891 0.849 0.916 39 sellaneous manufatures 0.891 0.849 0.857 0.916 Bus Advertsng and omputer data 0.776 0.851 0.776 0.866 Con Construton, engneerng, mnng 0.746 0.776 0.731 0.791 Edu Eduatonal serves 0.896 0.731 0.776 0.791 Fl Flm and tape rental 0.746 0.731 0.896 0.731 Fn Fnanal serves 0.836 0.776 0.881 0.806 Ins Net nsurane 0.806 0.806 0.881 0.791 Leg Legal serves 0.896 0.866 0.940 0.881 PaF Passenger fares 0.881 0.866 0.896 0.866 Rep Installaton, mantenane, repar 0.851 0.776 0.836 0.881 Tel Teleommunatons 0.672 0.701 0.701 0.761 Soure: Author s alulatons. Notes: Co-movement s defned as the perentage of quarters n whh the two exhange rate measures both depreated, wthout regard to the atual sze of the depreatons or appreatons. The manufaturng ndustres are lsted by number and follow Standard Industral Classfaton (SIC) desgnatons; nonmanufaturng ndustres are dentfed by letter odes. Correlatons use quarterly data. anufaturng uses SIC trade data for 1973-96 and North Ameran Industry Classfaton System trade data for 1997-2002. Nonmanufaturng data span 1986-2002. 12 Industry-Spef Exhange Rates for the Unted States
Appendx Tables (Contnued) Table A3 Correlatons between Contemporaneous and Lagged-Weght Exhange Rates Industry Code Industry Ttle xer xler mer mler ter tler 20 Food and kndred produts 0.990 0.997 0.996 21 Tobao manufatures 0.995 0.956 0.989 22 Textle mll produts 0.984 0.995 0.995 23 Apparel and related produts 0.988 0.994 0.996 24 Lumber and wood produts 0.995 0.999 0.998 25 Furnture and fxtures 0.989 0.998 0.996 26 Paper and alled produts 0.997 0.999 0.999 27 Prntng and publshng 0.998 0.998 0.999 28 Chemals and alled produts 0.994 0.999 0.999 29 Petroleum refnng 0.986 0.987 0.989 30 Rubber and plast produts 0.994 0.998 0.999 31 Leather and leather produts 0.990 0.994 0.995 32 Stone, lay, glass, and onrete produts 0.995 0.999 0.999 33 Prmary metal produts 0.993 0.992 0.997 34 Fabrated metal produts 0.992 0.999 0.998 35 ahnery, exludng eletral 0.997 0.998 0.999 36 Eletral and eletron 0.997 0.993 0.997 37 Transportaton equpment 0.995 0.997 0.997 38 Sentf nstruments 0.997 0.999 0.999 39 sellaneous manufatures 0.995 0.996 0.998 Bus Advertsng and omputer data 0.978 0.978 0.984 Con Construton, engneerng, mnng 0.930 0.915 0.968 Edu Eduatonal serves 0.993 0.750 0.942 Fl Flm and tape rental 0.904 0.766 0.852 Fn Fnanal serves 0.996 0.813 0.952 Ins Net nsurane 0.963 0.833 0.911 Leg Legal serves 0.996 0.994 0.999 PaF Passenger fares 0.997 0.998 0.999 Rep Installaton, mantenane, repar 0.988 0.960 0.985 Tel Teleommunatons 0.589 0.681 0.964 Soure: Author s alulatons. Notes: The manufaturng ndustres are lsted by number and follow Standard Industral Classfaton (SIC) desgnatons; nonmanufaturng ndustres are dentfed by letter odes. Correlatons use quarterly data. anufaturng uses SIC trade data for 1973-96 and North Ameran Industry Classfaton System trade data for 1997-2002. Nonmanufaturng data span 1987-2002. FRBNY Eonom Poly Revew / ay 2004 13
Endnotes 1. The response of dollar pres s small f foregn produers absorb the exhange rate movements n ther proft margn n order to sustan ther U.S. market share. Exhange rate pass-through nto mport pres may be omplete, as ours under produer urreny prng; partal; or neglgble, as ours under loal urreny prng. Campa and Goldberg (2002) analyze the degree of exhange rate pass-through nto mport pres for the Unted States and other Organzaton for Eonom Co-operaton and Development ountres. Campa and Goldberg (2004) explore the reasons behnd the relatve stablty of onsumer pres wth respet to exhange rates. 2. Avalable at <http://www.federalreserve.gov/releases/h10/ summary/>. 3. Campa and Goldberg (1995, 1997, 1999, 2001) show that a net external orentaton measure aountng for both the export orentaton and use of mported nputs by produers s approprate n some analyses, nludng studes of nvestment senstvty to exhange rates. 4. The ndustry-spef exhange rate database onstruted by the author s avalable at <http://www.newyorkfed.org/researh/ global_eonomy/ndustry_spef_exrates.html>. 5. The U.S. Census Bureau reently adopted the North Ameran Industry Classfaton System (NAICS) and has dropped reportng by SIC. Industry-level trade data are avalable only up to 2001 by SIC and avalable up to 2002 by NAICS. Both systems are reported n Table 1. 6. The resultng seres are onverted nto ndexes (based at 100 n 1990:1). 7. The averagng of export and mport weghts n equaton 3 s an ad ho onventon. Another varant would be to use as weghts the sum of blateral exports and mports, relatve to total exports plus mports of a partular ndustry. 8. Avalable at <http://www.federalreserve.gov/releases/h10/ summary/>. From the Federal Reserve Bulletn, Otober 1998: The urrenes of all foregn ountres or regons that had a share of U.S. non-ol mports or nonagrultural exports of at least 1/2 perent n 1997 are nluded n the broad ndes, as rankngs of U.S. tradng partners by share of U.S. trade n that year show. 9. The ountres are: Canada, euro area (Germany, Frane, Italy, Netherlands, Belgum, Luxembourg, Span, Ireland, Austra, Fnland, Portugal), Japan, exo, Chna, Unted Kngdom, Tawan, Korea, Sngapore, Hong Kong, alaysa, Brazl, Swtzerland, Thaland, Australa, Indonesa, Phlppnes, Russa, Inda, Sweden, Saud Araba, Israel, Argentna, Venezuela, Chle, and Colomba. The trade data treat Belgum and Luxembourg as one ountry; ths artle also referenes them as one ountry. Problems wth the tme-seres pre data led us to remove Russa from ths sample. The nonmanufaturng ndexes do not nlude Austra, Colomba, Ireland, Portugal, Russa, and Fnland beause dsaggregated data on these ountres are absent n our soure data from the Survey of Current Busness, publshed by the Bureau of Eonom Analyss (BEA). Industry-spef export and mport data for twenty manufaturng ndustres and thrty-four major U.S. tradng partners from 1972-94 were downloaded from <http://www.eon.udavs.edu/faulty/fzfeens/>, wth 1970, 1971, and 1972 manufaturng trade weghts set at 1972 shares. Post-1994 data are from the U.S. Internatonal Trade Commsson webste (<http://dataweb.ust.gov/>). Some weghtng observatons for some ountres n some years have been suppressed for onfdentalty reasons. anufaturng setor data are from the U.S. Department of Commere and the Internatonal Trade Commsson and nonmanufaturng data are from the BEA as reported n the Survey of Current Busness for 1986 onward. For lak of approprate earler data, we assume the 1986 ountry-partner weghts for nonmanufaturng ndustres apply to pre-1986 years. We use eonomywde pre ndexes to deflate blateral exhange rates. Post- 2001 weghts use NAICS onversons n ndustry defntons. 10. Profts from urrent produton are estmated by the BEA as the sum of profts before tax, the nventory valuaton adjustment, and the aptal onsumpton adjustment. For a dsusson of these data, see the BEA s Survey of Current Busness, September 2003, pp. 13-4. The manufaturng ndustres are: prmary metal ndustres, fabrated metal produts, ndustral mahnery and equpment, eletron and other eletral equpment, food and kndred produts, hemals and alled produts, petroleum and oal produts, and transportaton equpment. The nonmanufatutng ndustres are: fnanal serves, passenger fares, teleommunatons, eletrty and gas, retal trade, and wholesale trade. 11. For nonmanufaturng ndustres, we use the ndustry Gross Produt Orgnatng data. 12. The database posted wth ths artle (<http://www.newyorkfed.org/ researh/global_eonomy/ndustry_spef_exrates.html>) provdes export and mport data that permt researhers to hoose ther own weghtng shemes and tmng desons for these weghts. 14 Industry-Spef Exhange Rates for the Unted States
Endnotes (Contnued) 13. Consstent wth an extensve lterature on dollar exhange rates aganst major urrenes, the permanent omponent we onstrut usng standard Beverdge and Nelson (1981) or Hodrk and Presott (1997) methodologes losely traks the atual real exhange rate over most dates. The ntuton behnd the Beverdge and Nelson defnton s that expeted growth n the exhange rate should be hgher than average when the exhange rate s below ts trend level. The Hodrk- Presott flter assumes an alternatve defnton of the yle n the underlyng data, and removes a smooth trend as one would draw t wth a free hand drawng (Pedersen 2001). 14. Ths statement s onfrmed n our own work and n reent work by Pollard and Coughln (2003) on the top of mport pres and exhange rates. They show that ndustry-spef exhange rate measures statstally outperform aggregate trade-weghted exhange rates n explanng patterns n ndustry-level mport pre adjustment. FRBNY Eonom Poly Revew / ay 2004 15
Referenes Beverdge, Stephen, and Charles Nelson. 1981. A New Approah to the Deomposton of Eonom Tme Seres nto Permanent and Transtory Components. Journal of onetary Eonoms 7, no. 1 (arh): 151-74. Campa, Jose, and Lnda S. Goldberg. 1995. Investment n anufaturng, Exhange Rates, and External Exposure. Journal of Internatonal Eonoms 38, no. 3-4 (ay): 297-320.. 1997. The Evolvng External Orentaton of anufaturng: Evdene from Four Countres. Federal Reserve Bank of New York Eonom Poly Revew 3, no. 2 (July): 53-81.. 1999. Investment, Pass-Through, and Exhange Rates: A Cross-Country Comparson. Internatonal Eonom Revew 40, no. 2 (ay): 287-314.. 2001. Employment versus Wage Adjustment and the U.S. Dollar. Revew of Eonoms and Statsts 83, no. 3 (August): 477-89.. 2002. Exhange Rate Pass-Through nto Import Pres. Revsed unpublshed paper, Federal Reserve Bank of New York, Deember. Earler verson dstrbuted as NBER Workng Paper no. 8934, ay 2002.. 2004. Do Dstrbuton argns Solve the Exhange Rate Dsonnet Puzzle? Revsed unpublshed paper, Federal Reserve Bank of New York, January. Cogley, Tmothy. 2001. Alternatve Defntons of the Busness Cyle and Ther Implatons for Busness Cyle odels: A Reply to Torben ark Pedersen. Journal of Eonom Dynams and Control 25, no. 8 (August): 1103-7. Hodrk, Robert J., and Edward C. Presott. 1997. Postwar U.S. Busness Cyles: An Empral Investgaton. Journal of oney, Credt, and Bankng 29, no. 1 (February): 1-16. Pedersen, Torben ark. 2001. The Hodrk-Presott Flter, the Slutzky Effet, and the Dstortonary Effet of Flters. Journal of Eonom Dynams and Control 25, no. 8 (August): 1081-1102. Pollard, Patra, and Cletus Coughln. 2003. Pass-Through Estmates and the Choe of an Exhange Rate Index. Unpublshed paper, Federal Reserve Bank of St. Lous. Watson, ark W. 1986. Unvarate Detrendng ethods wth Stohast Trends. Journal of onetary Eonoms 18, no. 1 (July): 49-75. The vews expressed are those of the author and do not neessarly reflet the poston of the Federal Reserve Bank of New York or the Federal Reserve System. The Federal Reserve Bank of New York provdes no warranty, express or mpled, as to the auray, tmelness, ompleteness, merhantablty, or ftness for any partular purpose of any nformaton ontaned n douments produed and provded by the Federal Reserve Bank of New York n any form or manner whatsoever. 16 Industry-Spef Exhange Rates for the Unted States