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Real Exchange Rate, Productivity and Labor Market Rigidities

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Author Info
Yu Sheng (The Australian National University)
Xinpeng Xu (The Hong Kong Polytechnic University)
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 rigidities affects the strength of the structural relationship between real exchange rate and sectoral productivity and in some circumstances, the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for the difference in labor market rigidities across countries provides a better fit in estimating the Balassa-Samuelson effect.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 092009.

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Length: 25 pages
Date of creation: Feb 2009
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Handle: RePEc:hkm:wpaper:092009

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Related research
Keywords: The Balassa-Samuelson Model; Search Unemployment; Labor Market Rigidities;

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Find related papers by JEL classification:
F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
F31 - International Economics - - International Finance - - - Foreign Exchange
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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