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The real exchange rate of the dollar for a panel of OECD countries: Balassa-Samuelson or distribution sector effect?

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  • Mariam Camarero

Abstract

The purpose of this paper is to analyse the role of productivity in the behaviour of the dollar real exchange rate against a group of OECD countries' currencies. To do this, a general specification is tested, paying special attention to the breakdown of the productivity variable into tradables, non-tradables and distribution sector productivity. The applied methodology relies on the Pool Mean Group estimation methodology proposed by Pesaran et al (1999) to obtain error correction models in panels without imposing equal long and shortrun parameters for the panel. The results point to the relevance of the differences in the distribution sector productivity to explain the real exchange rate, especially in the European Union countries. These results are in accordance with New Open Macroeconomics models predictions concerning the role of both distribution sector productivity and fiscal expenditure on the real exchange rate.

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 06-04.

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Handle: RePEc:fda:fdadef:06-04

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  1. Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2005. "The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 05-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  2. Ronald MacDonald & Luca Antonio Ricci, 2001. "PPP and the Balassa Samuelson Effect," IMF Working Papers, International Monetary Fund 01/38, International Monetary Fund.
  3. Strauss, Jack, 1999. "Productivity differentials, the relative price of non-tradables and real exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(3), pages 383-409.
  4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," Working Papers, Hong Kong Institute for Monetary Research 062000, Hong Kong Institute for Monetary Research.
  5. Hsiu-Ling Wu, 1996. "Testing for the Fundamental Determinants of the Long-Run Real Exchange Rate: The Case of Taiwan," NBER Working Papers 5787, National Bureau of Economic Research, Inc.
  6. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers, Michigan State - Econometrics and Economic Theory 8905, Michigan State - Econometrics and Economic Theory.
  7. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc.
  8. Ganelli, Giovanni, 2003. "The New Open Economy Macroeconomics of Government Debt," Royal Economic Society Annual Conference 2003, Royal Economic Society 83, Royal Economic Society.
  9. Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, Elsevier, vol. 1(1), pages 39-56, January.
  10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 584.
  11. Jose De Gregorio & Alberto Giovannini & Holger C. Wolf, 1993. "International Evidence on Tradables and Nontradables Inflation," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 93-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  12. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
  13. Devereux, Michael B, 1999. "Real Exchange Rate Trends and Growth: A Model of East Asia," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 509-21, August.
  14. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9526, Faculty of Economics, University of Cambridge.
  15. Jaewoo Lee & Man-Keung Tang, 2007. "Does Productivity Growth Appreciate the Real Exchange Rate?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 15(1), pages 164-187, 02.
  16. Enrique Alberola-Ila & Tymo Tyrväinen, 1998. "Is there Scope for Inflation Differentials in EMU? An Empirical Evaluation of the Balassa-Samuelson Model in EMU Countries," Banco de Espa�a Working Papers, Banco de Espa�a 9823, Banco de Espa�a.
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Cited by:
  1. Lopcu, Kenan & Dülger, Fikret & Burgaç, Almıla, 2013. "Relative productivity increases and the appreciation of the Turkish lira," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 614-621.
  2. Fernando Alexandre & Pedro Bação, 2012. "Portugal before and after the European Union: Facts on Nontradables," NIPE Working Papers, NIPE - Universidade do Minho 15/2012, NIPE - Universidade do Minho.

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