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The effects of news about future productivity on international relative prices: an empirical investigation

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  • Deokwoo Nam
  • Jian Wang

Abstract

In this paper, we find that expected (news) and unexpected (contemporaneous) components of productivity changes have opposite effects on the U.S. real exchange rate. Following Barsky and Sims' (2010) identification method, we decompose US total factor productivity (TFP) into news and contemporaneous productivity changes. The US real exchange rate appreciates following a favorable news shock to TFP, while it depreciates in response to a positive contemporaneous shock. In addition, the identified news TFP shocks play a much more important role than the identified contemporaneous TFP shocks in driving the US real exchange rate. These findings provide empirical guidance to important international macroeconomic issues, such as the international transmission of productivity shocks and the modeling of exchange rate volatility.

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File URL: http://dallasfed.org/assets/documents/institute/wpapers/2010/0064.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 64.

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Date of creation: 2010
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Handle: RePEc:fip:feddgw:64

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Keywords: Business cycles ; Foreign exchange rates ; Productivity;

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Cited by:
  1. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do Mood Swings Drive Business Cycles and is it Rational?," NBER Working Papers 17651, National Bureau of Economic Research, Inc.
  2. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
  3. Ryo Jinnai, 2011. "News Shocks, Price Levels, and Monetary Policy," Global COE Hi-Stat Discussion Paper Series gd10-173, Institute of Economic Research, Hitotsubashi University.

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