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Productivity and the Real Euro-Dollar Exchange Rate

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  • Vivien Lewis

Abstract

This paper analyses empirically how changes in productivity affect the real eurodollar exchange rate. We consider the two-sector new open macro model in Benigno and Thoenissen (2003). The model predictions are used, in the form of sign restrictions, to identify productivity shocks in a structural vector autoregression. We estimate economy-wide and traded sector productivity shocks, controlling for demand and nominal factors. Our results show that productivity shocks are much less important in explaining the variation in the euro-dollar exchange rate than are demand and nominal shocks. In particular, productivity can explain part of the appreciation of the dollar in the late 1990s only to the extent that it created a boost to aggregate demand in the US. We find an insignificant contribution of the Balassa-Samuelson effect.

Suggested Citation

  • Vivien Lewis, 2004. "Productivity and the Real Euro-Dollar Exchange Rate," Working Papers of Department of Economics, Leuven ces0406, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:ces0406
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    File URL: https://lirias.kuleuven.be/bitstream/123456789/121540/1/Dps0406.pdf
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    Cited by:

    1. Lambrias, Kyriacos, 2011. "World Technology Shocks and the Real Euro-Dollar Exchange Rate," TSE Working Papers 11-261, Toulouse School of Economics (TSE).

    More about this item

    Keywords

    real exchange rate; productivity; VAR; sign restrictions;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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