The Effect of Exchange Rate Changes on Germany's Exports

Author Name THORBECKE, Willem  (Senior Fellow, RIETI) /KATO Atsuyuki  (Waseda University)
Creation Date/NO. December 2012 12-E-081
Research Project East Asian Production Networks and Global Imbalances
Download / Links


Germany's nominal exchange rate has remained weaker because it is linked to weaker eurozone economies. Germany's real exchange rate also depreciated vis-à-vis eurozone countries after 2000 because German firms and workers controlled unit labor costs. This paper investigates how exchange rate changes affect German exports. Results from Johansen maximum likelihood and dynamic ordinary least squares (DOLS) estimation indicate that the export elasticity for the unit labor cost-deflated exchange rate equals 0.6. Results from panel DOLS estimation indicate that price elasticities are much higher for consumption goods exports than for capital goods exports and for exports to the eurozone than for exports outside of it. These results imply that Germany's internal devaluation after 2000 contributed to a surge in exports to Europe.