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Does Productivity Growth Appreciate the Real Exchange Rate?

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  • Jaewoo Lee
  • Man-Keung Tang

Abstract

Revisiting the time-honored link between productivity growth and the real exchange rate, we find that higher labor productivity tends to appreciate the real exchange rate, consistent with the traditional view. Contrary to the traditional view, however, we find that the positive productivity effect is transmitted through the relative price between tradable goods, rather than through the relative price between tradables and nontradables. Moreover, higher total factor productivity is found to often depreciate the real exchange rate. These latter two pieces of evidence, combined with the conceptual strength of total factor productivity over labor productivity as a productivity measure, call for further refinement of the conventional view regarding the effect of productivity on the real exchange rate. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

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  • Jaewoo Lee & Man-Keung Tang, 2007. "Does Productivity Growth Appreciate the Real Exchange Rate?," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 164-187, February.
  • Handle: RePEc:bla:reviec:v:15:y:2007:i:1:p:164-187
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    References listed on IDEAS

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    1. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    2. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2005. "Productivity Spillovers, Terms of Trade and the 'Home Market Effect'," CEPR Discussion Papers 4964, C.E.P.R. Discussion Papers.
    3. repec:spo:wpecon:info:hdl:2441/9244 is not listed on IDEAS
    4. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," International Finance Discussion Papers 744, Board of Governors of the Federal Reserve System (U.S.).
    5. Takatoshi Ito & Tamim Bayoumi & Peter Isard & Steven A. Symansky, 1996. "Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region," IMF Occasional Papers 145, International Monetary Fund.
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    Cited by:

    1. Camarero, Mariam, 2008. "The real exchange rate of the dollar for a panel of OECD countries: Balassa-Samuelson or distribution sector effect?," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 620-632, December.
    2. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2009. "The Illusion of Precision and the Role of the Renminbi in Regional Integration," Chapters,in: Towards Monetary and Financial Integration in East Asia, chapter 13 Edward Elgar Publishing.
    3. Bordo, Michael D. & Choudhri, Ehsan U. & Fazio, Giorgio & MacDonald, Ronald, 2017. "The real exchange rate in the long run: Balassa-Samuelson effects reconsidered," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 69-92.
    4. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    5. Romain Restout, 2009. "The Balassa-Samuelson model in general equilibrium with markup variations," EconomiX Working Papers 2009-39, University of Paris Nanterre, EconomiX.
    6. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    7. Hiroaki Sasaki, 2011. "Export of Deindustrialization and Anti-Balassa-Samuelson Effect: The Consequences of Productivity Growth Differential," Discussion papers e-10-015, Graduate School of Economics Project Center, Kyoto University.
    8. Frensch, Richard & Schmillen, Achim, 2011. "Can we identify Balassa-Samuelson effects with measures of product variety?," Economic Systems, Elsevier, vol. 35(1), pages 98-108, March.
    9. Peltonen, Tuomas & Sager, Michael, 2009. "Productivity shocks and real exchange rate: a reappraisal," Working Paper Series 1046, European Central Bank.
    10. Taya Dumrongrittikul & Heather Anderson & Farshid Vahid, 2014. "The Effects of Productivity Gains in Asian Emerging Economies: A Global Perspective," Monash Econometrics and Business Statistics Working Papers 23/14, Monash University, Department of Econometrics and Business Statistics.
    11. Tuomas A. Peltonen & Adina Popescu & Michael Sager, 2011. "Can non‐linear real shocks explain the persistence of PPP exchange rate disequilibria?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(3), pages 290-306, July.
    12. Ehsan U. Choudhri & Lawrence L. Schembri, 2010. "Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa-Samuelson Hypothesis Revisited," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 924-936, November.
    13. Rui Mano & Marola Castillo, 2015. "The Level of Productivity in Traded and Non-Traded Sectors for a Large Panel of Countries," IMF Working Papers 15/48, International Monetary Fund.
    14. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.

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