Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour

Thi Hong Thinh Doan and Karine Gente ()

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Abstract: The present study develops a two-sector specific factor model in which capital is mobile between sectors. We assume that the traded (non-traded) sector uses skilled (unskilled) labour for production. The theoretical model reveals that the real exchange rate (RER) response to a productivity shock depends on the countries' relative abundance of skilled labour: a rise in traded productivity leads to a higher RER appreciation in a country whose relative skilled labour rate is high. Using panel data, structural break tests confirm that the skilled versus unskilled labour ratio may be a significant splitting variable. In the long run, the relationship between productivity and RER may be positive or negative, as suggested by the theoretical model, depending on the country's relative abundance of skilled labour.

Keywords: Balassa-Samuelson effect; overlapping generations; Real exchange rate; Skilled labour (search for similar items in EconPapers)
Date: 2014
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Published in Journal of Macroeconomics, 2014, 40 (C), pp.1-15. ⟨10.1016/j.jmacro.2014.01.005⟩

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Journal Article: Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01474431

DOI: 10.1016/j.jmacro.2014.01.005

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