Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries

Matthew Canzoneri, Robert Cumby () and Behzad Diba

No 5676, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, for a class of technologies including Cobb-Douglas, the model implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, the model assumes that purchasing power parity holds for traded goods in the long-run. We test each of these implications using data from a panel of OECD countries. Our results suggest that the first of these two fits the data quite well. In the long run, relative prices generally reflect relative labor productivities. The evidence on purchasing power parity in traded goods is considerably less favorable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. On the other hand, when we look at DM exchange rates purchasing power parity appears to be a somewhat better characterization of traded goods prices.

JEL-codes: F30 F31 (search for similar items in EconPapers)
Date: 1996-07
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (78)

Published as Canzoneri, Matthew B., Robert E. Cumby and Behzad Diba. "Relative Labor Productivity And The Real Exchange Rate In The Long Run: Evidence For A Panel Of OECD Countries," Journal of International Economics, 1999, v47(2,Apr), 245-266.

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Journal Article: Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries (1999)
Working Paper: Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries (1996)
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