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Real exchange rate, productivity and labor market frictions

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  • Sheng, Yu
  • Xu, Xinpeng

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 matching efficiency affects the strength of the structural relationship between the real exchange rate and sectoral productivity through influencing labor's choice between employment and unemployment as well as movement across sectors. When the relative labor market matching friction is high, search unemployment is high and the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for differences in labor market frictions across countries provides a better fit in estimating the Balassa-Samuelson effect.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 3 (April)
Pages: 587-603

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:3:p:587-603

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: The Balassa-Samuelson model Search unemployment Labor market efficiency;

References

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Cited by:
  1. Michael D. Bordo & Ehsan U. Choudhri & Giorgio Fazio & Ronald MacDonald, 2014. "The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered," CESifo Working Paper Series 4870, CESifo Group Munich.
  2. repec:hal:journl:halshs-00786095 is not listed on IDEAS
  3. Agnes Benassy-Quere & Dramane Coulibaly, 2013. "The Impact of Market Regulations on Intra-European Real Exchange Rates," CESifo Working Paper Series 4082, CESifo Group Munich.
  4. Agnès Bénassy-Quéré & Dramane COULIBALY, 2014. "The Impact of Market Regulations on Intra-European Real Exchange Rates," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00961713, HAL.

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