Production Networks and the Open Macroeconomy

A key feature of globalization in the current era has been the rapid spread of cross-border production sharing in many regions of the world, including Europe, North America and Asia. The effects of these developments in the context of regional trade integration have been examined in the recent literature. This paper looks at their implications for regional monetary integration and exchange-rate policies. Cross-border production networks and the intra-industry trade associated with them affect exchange-rate behavior, balance of payments adjustment, and the transmission of shocks and disturbances. This paper examines the policy implications of regional production networks that (i) are confined to the countries of a given region, and (ii) involve a dominant extra-regional economy