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Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour

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  • Doan, Thi Hong Thinh
  • Gente, Karine

Abstract

The present study develops a two-sector specific factor model in which capital is mobile between sectors. We assume that the traded (non-traded) sector uses skilled (unskilled) labour for production. The theoretical model reveals that the real exchange rate (RER) response to a productivity shock depends on the countries’ relative abundance of skilled labour: a rise in traded productivity leads to a higher RER appreciation in a country whose relative skilled labour rate is high. Using panel data, structural break tests confirm that the skilled versus unskilled labour ratio may be a significant splitting variable. In the long run, the relationship between productivity and RER may be positive or negative, as suggested by the theoretical model, depending on the country’s relative abundance of skilled labour.

Suggested Citation

  • Doan, Thi Hong Thinh & Gente, Karine, 2014. "Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 1-15.
  • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:1-15
    DOI: 10.1016/j.jmacro.2014.01.005
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    Keywords

    Overlapping generations; Real exchange rate; Balassa–Samuelson effect; Skilled labour;

    JEL classification:

    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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