The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered

Michael Bordo, Ehsan Choudhri (), Giorgio Fazio and Ronald MacDonald

No 20228, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-cba, nep-int and nep-opm
Note: DAE IFM
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Citations: View citations in EconPapers (14)

Published as Bordo, Michael D. & Choudhri, Ehsan U. & Fazio, Giorgio & MacDonald, Ronald, 2017. "The real exchange rate in the long run: Balassa-Samuelson effects reconsidered," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 69-92.

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Journal Article: The real exchange rate in the long run: Balassa-Samuelson effects reconsidered (2017)
Working Paper: The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered (2014)
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