Productivity and the Euro-Dollar Exchange Rate Puzzle

Ron Alquist and Menzie Chinn

No 8824, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper documents the evidence for a productivity based model of the dollar/euro real exchange rate over the 1985-2001 period. We estimate cointegrating relationships between the real exchange rate, productivity, and the real price of oil using the Johansen (1988) and Stock-Watson (1993) procedures. We find that each percentage point in the US-Euro area productivity differential results in a five percentage point real appreciation of the dollar. This finding is robust to the estimation methodology, the variables included in the regression, and the sample period. We conjecture that productivity-based models cannot explain the observed patterns with the standard set of assumptions, and describe a case in which the model can be reconciled with the observed data.

JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-eff and nep-ifn
Note: IFM
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Citations: View citations in EconPapers (52)

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