Productivity Trends and the Sterling Real Exchange Rates *

Frank Engels, Panagiotis Th. Konstantinou and Jens Sondergaard ()

Review of International Economics, 2007, vol. 15, issue 3, pages 612-637

Abstract: This paper provides favorable econometric evidence for a productivity-based model of the pound/euro real exchange rate. We find that a 1% increase in UK productivity is consistent with a 3.5% real depreciation of sterling. Likewise, a 1% increase in euro area productivity is compatible with a 5.16% real appreciation of sterling. The asymmetric response of UK and foreign productivity shocks corresponds well with our model if UK labor supply is more elastic than euro area labor supply. Estimates of equilibrium exchange rates suggest that sterling was not overvalued at its 2004Q3 level vis-à-vis the euro. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

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