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Productivity and Wedges: Economic Convergence and the Real Exchange Rate

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Listed:
  • Michael B. Devereux
  • Ippei Fujiwara
  • Camilo Granados

Abstract

This paper explores the relationship between economic growth and the real exchange rate, specifically focusing on the convergence in price levels in Eastern European countries. While these countries have had significant convergence in GDP per capita (relative to the EU average) since the 1990s, convergence in real exchange rates for these countries stalled after the EU crisis. Using a standard theoretical framework, we estimate the main drivers of real exchange rates and show that a combination of productivity growth (Balassa-Samuelson effects) and labor market distortions help explain real exchange rate trends. We develop a structural two-country model that provides a rich decomposition of the long run determinants of the real exchange rate. Simulations based on observed sectoral productivities and labor market wedges show that the model can accurately account for the historical path of Eastern European real exchange rates, both before and after the EU crisis.

Suggested Citation

  • Michael B. Devereux & Ippei Fujiwara & Camilo Granados, 2025. "Productivity and Wedges: Economic Convergence and the Real Exchange Rate," NBER Working Papers 34183, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34183
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    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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