Real Exchange Rate, Productivity and Labor Market Rigidities

Yu Sheng () and Xinpeng Xu

No 92009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: We extend the classic Balassa-Samuelson model to an environment with search unemployment. We show that the classic Balassa-Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market rigidities affects the strength of the structural relationship between real exchange rate and sectoral productivity and in some circumstances, the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for the difference in labor market rigidities across countries provides a better fit in estimating the Balassa-Samuelson effect.

Keywords: The Balassa-Samuelson Model; Search Unemployment; Labor Market Rigidities (search for similar items in EconPapers)
JEL-codes: F16 F31 J64 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2009-02
New Economics Papers: this item is included in nep-cba, nep-lab and nep-opm
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