The Exchange Rate Elasticity of Exports: A Shock-Dependent Approach

The exchange rate elasticity of exports is often interpreted and estimated as an unconditional structural parameter in the literature. We show that this elasticity, in fact, varies across the structural shocks that generate movements in the exchange rate in the first place. We use a small-open-economy SVAR model, estimated with Canadian data, to derive estimates for the conditional exchange rate elasticity of exports (CEREE) for seven structural shocks used in the literature. Estimates for CEREEs vary in magnitude, sign, and significance across shocks. They are stronger for foreign shocks and weaker than expected by standard economic theory for domestic and exogenous exchange rate shocks. Recent developments from the dominant currency paradigm can potentially explain some, but not all, of our results. Our findings highlight the risk of treating the exchange rate elasticity as an unconditional structural relationship in forming expectations.