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

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Author Info
Canzoneri, Matthew B
Cumby, Robert
Diba, Behzad

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Abstract

The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, the model implies that the relative price of non-traded goods in each country should reflect the relative productivity of labour in the traded and non-traded goods sectors. Second, the model assumes that purchasing power parity (PPP) 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. The evidence on purchasing power parity in traded goods is considerably less favourable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. When we look at Deutsche Mark exchange rates, PPP appears to be a somewhat better characterization of traded goods prices.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1464.

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Date of creation: Sep 1996
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Handle: RePEc:cpr:ceprdp:1464

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Keywords: Real Exchange Rates

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Find related papers by JEL classification:
F0 - International Economics - - General
F3 - International Economics - - International Finance

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  2. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: A General Equilibrium Appraisal," UCLA Economics Working Papers 709, UCLA Department of Economics. [Downloadable!]
  4. Evans, Charles L., 1992. "Productivity shocks and real business cycles," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 191-208, April. [Downloadable!] (restricted)
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  5. Menzie Chinn, 1995. "Whither the Yen? Implications of an intertemporal model of the Yen/Dollar rate," International Finance 9508001, EconWPA, revised 28 Aug 1995. [Downloadable!]
  6. Asea, Patrick K & Corden, W Max, 1994. "The Balassa-Samuelson Model: An Overview," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 191-200, October.
  7. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 631-53, October. [Downloadable!] (restricted)
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  8. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: An Overview," UCLA Economics Working Papers 710, UCLA Department of Economics. [Downloadable!]
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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  11. Jorion, Philippe & Sweeney, Richard J., 1996. "Mean reversion in real exchange rates: evidence and implications for forecasting," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 535-550, August. [Downloadable!] (restricted)
  12. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  13. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  15. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27. [Downloadable!]
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