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Equilibrium Exchange Rates and Supply-Side Performance

  • Gianluca Benigno

    (London School of Economics)

  • Christoph Thoenissen

    (Bank of England)

We develop a two-country, optimising, sticky prices and sticky wages model of real exchange rate determination in the new open macroeconomics tradition to analyse the interaction between supply-side behaviour, market structure and the real exchange rate. For a UK-euro area calibration, supply-side improvements to total factor productivity (TFP) or the degree of monopolistic competition in the goods and labour markets result in a depreciation of the real exchange rate. When TFP increases in the traded goods sector, a depreciation of the terms of trade offsets the appreciation of the relative price of non-traded goods, contrasting with the Balassa-Samuelson proposition. Copyright Royal Economic Society 2003

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Article provided by Royal Economic Society in its journal Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 486 (March)
Pages: C103-C124

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Handle: RePEc:ecj:econjl:v:113:y:2003:i:486:p:c103-c124
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