Productivity shocks and real exchange rate: a reappraisal

Tuomas A. Peltonen and Michael Sager

No 1046, Working Paper Series from European Central Bank

Abstract: We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination. We find evidence of significant correlation between real exchange rates and productivity differentials in both sectors. But our finding of a significant role for the non-traded sector in exchange rate determination, and of a relatively larger correlation between exchange rates and productivity shocks of a given size emanating from this sector, represent clear contradictions of the widely cited Balassa-Samuelson hypothesis. Our findings remain valid in the face of a number of robustness tests, including the exchange rate regime and numéraire currency. JEL Classification: F31, O47, C23

Keywords: Balassa-Samuelson; emerging market economies; exchange rate; Panel data; productivity (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cba, nep-eff, nep-ifn and nep-opm
Note: 355041
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091046

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