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Real Exchange Rates and Sectoral Productivity in the Eurozone

Author

Listed:
  • Martin Berka

    (School of Economics and Finance, Massey University)

  • Michael B. Devereux

    (Vancouver School of Economics, The University of British Columbia)

  • Charles Engel

    (Department of Economics, University of Wisconsin)

Abstract

We investigate the link between real exchange rates and sectoral TFP for Eurozone countries. We show that real exchange rate variation, both cross-country and time series, closely accords with an amended Balassa-Samualson interpretation, incorporating sectoral productivity shocks and a labor market wedge. We construct a DSGE model to generate a cross-section and time series of real exchange rates compared to data. Estimates from simulated regressions are very similar to estimates for Eurozone data. Our findings contrast with previous studies that have found little relationship between productivity and real exchange rates among high-income countries that have floating nominal exchange rates.

Suggested Citation

  • Martin Berka & Michael B. Devereux & Charles Engel, 2017. "Real Exchange Rates and Sectoral Productivity in the Eurozone," Working Papers 1, New Zealand Centre of Macroeconomics.
    • Handle: RePEc:nzm:wpaper:wp1
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    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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