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Real Exchange Rates and Sectoral Productivity in the Eurozone

Martin Berka, Michael Devereux and Charles Engel

No GRU_2017_009, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We investigate the link between real exchange rates and sectoral TFP for Eurozone countries. We show that real exchange rate variation, both cross-country and time series, closely accords with an amended Balassa-Samuelson interpretation, incorporating sectoral productivity shocks and a labor market wedge. We construct a DSGE model to generate a cross-section and time series of real exchange rates to compare to data. Estimates from simulated regressions are very similar to estimates for Eurozone data. Our findings contrast with previous studies that have found little relationship between productivity and real exchange rates among high-income countries that have floating nominal exchange rates.

Keywords: Balassa-Samuelson; Real Exchange Rates; Eurozone; Total Factor Productivity; Labor Wedge; Unit Labor Cost (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2017-05-31
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Citations:

Published in American Economic Review, vol. 108(6), pages 1543-1581, June

Downloads: (external link)
https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232 ... Devereux%20Engel.pdf (application/pdf)

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