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Real Exchange Rates in Developing Countries

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  • Mohsin S. Khan
  • Ehsan U. Choudhri

Abstract

There is little empirical research on whether Balassa-Samuelson effects can explain the long-run behavior of real exchange rates in developing countries. This paper presents new evidence on this issue based on a panel data sample of 16 developing countries. The paper finds that the traded-nontraded productivity differential is a significant determinant of the relative price of nontraded goods, and the relative price in turn exerts a significant effect on the real exchange rate. The terms of trade also influence the real exchange rate. These results provide strong verification of Balassa-Samuelson effects for developing countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/188.

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Length: 22
Date of creation: 01 Oct 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/188

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Related research

Keywords: Developing countries; Real effective exchange rates; Productivity; exchange rate; real exchange rate; relative price; terms of trade; exchange rates; relative prices; real exchange rates; constant local currency; foreign exchange; currency units; real value; log real exchange rate;

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References

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  1. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
  2. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(486), pages C103-C124, March.
  3. Paul Bergin & Reuven Glick & Alan M. Taylor, 2004. "Productivity, Tradability, and the Long-Run Price Puzzle," NBER Working Papers 10569, National Bureau of Economic Research, Inc.
  4. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers, Department of Economics, Williams College 2000-02, Department of Economics, Williams College.
  5. Takatoshi Ito & Peter Isard & Steven Symansky, 1997. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Working Papers 5979, National Bureau of Economic Research, Inc.
  6. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  7. Edward L. Glaeser & David Laibson & Bruce Sacerdote, 2001. "The Economic Approach to Social Capital," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1916, Harvard - Institute of Economic Research.
  8. 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.
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