Equilibrium Exchange Rates and Supply Side Performance

Gianluca Benigno and Christoph Thoenissen

No 19, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: This paper develops a two country, optimising, sticky price model of real exchange rate determination in the ënew open macroeconomics' tradition which allows several different forms of deviation from Purchasing Power Parity (PPP), both along the adjustment path and in the steady state. The model has a rich structure, and is designed to provide a flexible tool for policy analysis. Unlike most other papers in the literature, both of the key components of the real exchange rate -- the relative price of non-tradables, and the terms of trade -- are made endogenous, allowing a more complete analysis of the impact of structural shocks. To illustrate one possible application, the model is calibrated to match key elements of the UK and euro area economies, and used to examine the extent to which possible improvements in the UK's relative supply side performance might account for the sharp and persistent appreciation in sterling since 1996. The results are not supportive of this hypothesis. In the model, improvements in productivity, goods market and labour market competitiveness are all associated with a depreciation in both the spot and the equilibrium real sterling exchange rates. Two potential supply-side sources of an equilibrium appreciation -- a productivity improvement biased towards traded goods (Balassa-Samuelson effect), and an anticipated future productivity rise -- are considered; however each is insufficient to account for a long run equilibrium appreciation; the latter may account for an initial appreciation of the real exchange rate. We conclude by considering further mechanisms which could affect our results.

Date: 2002-08-29
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://repec.org/res2002/Benigno.pdf full text

Related works:
Journal Article: Equilibrium Exchange Rates and Supply-Side Performance (2003)
Working Paper: Equilibrium exchange rates and supply-side performance (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2002:19

Access Statistics for this paper

More papers in Royal Economic Society Annual Conference 2002 from Royal Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().