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Real Exchange Rates and Fundamentals: A Cross-Country Perspective

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Author Info
Jaewoo Lee
Gian Maria Milesi-Ferretti
Luca Antonio Ricci

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Abstract

This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the CPI-based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets and in government consumption tend to be associated with appreciating real exchange rates.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/13.

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Length: 25 pages
Date of creation: 30 Jan 2008
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Handle: RePEc:imf:imfwpa:08/13

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Keywords: Real effective exchange rates ; Productivity ; Trade ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1996. "Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," CEPR Discussion Papers 1464, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Ilan Goldfajn & Rodrigo O. ValdŽs, 1999. "The Aftermath Of Appreciations," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 229-262, February. [Downloadable!] (restricted)
  3. Mohsin S. Khan & Ehsan U. Choudhri, 2004. "Real Exchange Rates in Developing Countries: Are Balassa-Samuelson Effects Present?," IMF Working Papers 04/188, International Monetary Fund. [Downloadable!]
  4. Hamid Faruqee & Peter Isard, 1998. "Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 167, International Monetary Fund.
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  6. Sarma Jayanthi & Tamim Bayoumi & Jaewoo Lee, 2005. "New Rates from New Weights," IMF Working Papers 05/99, International Monetary Fund. [Downloadable!]
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  7. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 1-118. [Downloadable!]
  8. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 353, European Central Bank. [Downloadable!]
  10. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  12. Ostry, Jonathan D, 1994. "Government Purchases and Relative Prices in a Two-Country World," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 149-61, June.
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  14. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May. [Downloadable!] (restricted)
  15. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
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  16. Jose De Gregorio & Holger C. Wolf & Alberto Giovannini, 1994. "International Evidence on Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
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  17. Hamid Faruqee & Martin Fetherston & Peter Isard & G. Russell Kincaid, 2001. "Methodology for Current Account and Exchange Rate Assessments," IMF Occasional Papers 209, International Monetary Fund.
  18. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  19. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May. [Downloadable!] (restricted)
  20. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  21. Ronald MacDonald & Luca Antonio Ricci, 2005. "The Real Exchange Rate And The Balassa-Samuelson Effect: The Role Of The Distribution Sector," Pacific Economic Review, Blackwell Publishing, vol. 10(1), pages 29-48, 02. [Downloadable!] (restricted)
  22. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
  23. Chihwa Kao & Min-Hsien Chiang, 1999. "On the Estimation and Inference of a Cointegrated Regression in Panel Data," Center for Policy Research Working Papers 2, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
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  24. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate - A Stock-Flow Perspective," IMF Working Papers 94/90, International Monetary Fund.
  25. Joseph E. Gagnon, 1996. "Net foreign assets and equilibrium exchange rates: panel evidence," International Finance Discussion Papers 574, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  26. Edwards, Sebastian & Ostry, Jonathan D., 1990. "Anticipated protectionist policies, real exchange rates, and the current account: the case of rigid wages," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 206-219, June. [Downloadable!] (restricted)
  27. Man-Keung Tang & Jaewoo Lee, 2003. "Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?," IMF Working Papers 03/154, International Monetary Fund. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Abdul Abiad & Prakash Kannan & Jungjin Lee, 2009. "Evaluating Historical CGER Assessments:How Well Have They Predicted Subsequent Exchange Rate Movements?," IMF Working Papers 09/32, International Monetary Fund. [Downloadable!]
  2. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?," IMF Working Papers 09/20, International Monetary Fund. [Downloadable!]
  3. Klaus-Stefan Enders, 2009. "Exchange Rate Assessment for Oil Exporters," IMF Working Papers 09/81, International Monetary Fund. [Downloadable!]
  4. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Vahagn Galstyan and Philip R. Lane, 2008. "Fiscal Policy and International Competitiveness: Evidence from Ireland," The Institute for International Integration Studies Discussion Paper Series iiisdp274, IIIS. [Downloadable!]
    Other versions:
  6. Ehsan U. Choudhri & Lawrence L. Schembri, 2009. "Productivity, the Terms of Trade, and the Real Exchange Rate: The Balassa-Samuelson Hypothesis Revisited," Working Papers 09-22, Bank of Canada. [Downloadable!]
  7. Emilio Pineda & Paul Cashin & Yan Sun, 2009. "Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union," IMF Working Papers 09/78, International Monetary Fund. [Downloadable!]
  8. Galstyan, Vahagn A. & Lane, Philip R., 2008. "The Composition of Government Spending and the Real Exchange Rate," CEPR Discussion Papers 6903, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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