Endogenous Productivity, Exchange Rates, and Sudden Stops

Pablo Guerron, Felipe Saffie and Nils Mattis Gornemann
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Nils Mattis Gornemann: International Finance Board of Governors

No 1490, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores a new link between real interest rate dynamics, sectoral productivity and the real exchange rate. In particular, we develop a quantitative model in which country spread shocks affect productivity growth in the tradable and non tradable sector. Two new channels emerge influencing real exchange rate dynamics in addition to the direct channel driven by the change in the real interest rate. First, trend dynamics trigger wealth effects leading to larger fluctuations in domestic prices. Second, the model delivers an endogenous Balassa-Samuelson effect as differential movements in the productivity of the tradable and non-tradable sector lead to relative price movements. The calibrated model is consistent with the Mexican experience in the 1980s and 1990s. The downward trend of the real interest rate experienced by Mexico generates a stronger TFP growth on the tradable sector than on the non tradable sector driving a persistent appreciation of the real Mexican peso. The model is also consistent with the sharp depreciation and the productivity slump triggered by the Tequila crisis.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1490

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