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Productivity and the Real Euro-Dollar Exchange Rate

Vivien Lewis ()

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: This paper analyses empirically how changes in productivity affect the real eurodollar exchange rate. We consider the two-sector new open macro model in Benigno and Thoenissen (2003). The model predictions are used, in the form of sign restrictions, to identify productivity shocks in a structural vector autoregression. We estimate economy-wide and traded sector productivity shocks, controlling for demand and nominal factors. Our results show that productivity shocks are much less important in explaining the variation in the euro-dollar exchange rate than are demand and nominal shocks. In particular, productivity can explain part of the appreciation of the dollar in the late 1990s only to the extent that it created a boost to aggregate demand in the US. We find an insignificant contribution of the Balassa-Samuelson effect.

Keywords: real exchange rate; productivity; VAR; sign restrictions (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-cba, nep-eff and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:ces0406

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