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Terms of Trade, Productivity, and the Real Exchange Rate

  • Jose De Gregorio
  • Holger C. Wolf

The paper examines the effects of terms of trade movements and productivity differentials across sectors on the behavior of the real exchange rate. We develop a simple model of a small open economy producing exportable and nontradable goods and consuming importable and nontradable goods and present empirical evidence for a sample of fourteen OECD countries. The evidence broadly supports the predictions of the model, namely that faster productivity growth in the tradable relative to the nontradable sector and an improvement in the terms of trade induce a real appreciation.

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File URL: http://www.nber.org/papers/w4807.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4807.

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Date of creation: Jul 1994
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Handle: RePEc:nbr:nberwo:4807
Note: IFM
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  1. R. Barrell & R. Anderton & GM Caporale & JW in't Veld, 1993. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 143(1), pages 27-53, February.
  2. Obstfeld, Maurice, 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers 233187, University of California-Berkeley, Department of Economics.
  3. R. Barrell & R. Anderton & N. Vaughan & J.W. in't Veld, 1994. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 147(1), pages 30-49, February.
  4. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
  5. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," NBER Working Papers 4119, National Bureau of Economic Research, Inc.
  6. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Relative Price Movements in Dynamic General Equilibrium Models of International Trade," NBER Working Papers 4243, National Bureau of Economic Research, Inc.
  7. Marion, Nancy P., 1984. "Nontraded goods, oil price increases and the current account," Journal of International Economics, Elsevier, vol. 16(1-2), pages 29-44, February.
  8. Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
  9. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  10. Neary, J Peter, 1987. "Determinants of the Equilibrium Real Exchange Rate," CEPR Discussion Papers 209, C.E.P.R. Discussion Papers.
  11. R. Anderton & R. Barrell & JW in't Veld, 1992. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 141(1), pages 28-47, August.
  12. Hsieh, David A., 1982. "The determination of the real exchange rate : The productivity approach," Journal of International Economics, Elsevier, vol. 12(3-4), pages 355-362, May.
  13. R. Anderton & R. Barrell & JW in't Veld, 1992. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 140(1), pages 26-44, May.
  14. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  15. David K. Backus & Gregor W. Smith, 1992. "Consumption and Real Exchange Rates in Dynamic Exchange Economies with Nontraded Goods," Working Papers 92-7, New York University, Leonard N. Stern School of Business, Department of Economics.
  16. F. J.M. Meyer-zu-Schlochtern, 1988. "An International Sectoral Data Base for Thirteen OECD Countries," OECD Economics Department Working Papers 57, OECD Publishing.
  17. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
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