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Productivity, Commodity Prices and the Real Exchange Rate: The Long-Run Behavior of the Canada-US Exchange Rate

  • Ehsan U. Choudhri

    (Department of Economics, Carleton University, Canada)

  • Lawrence L. Schembri

    ()

    (Bank of Canada, Canada)

The paper examines the Canada-U.S. real exchange rate since the early 1970’s to test two popular explanations of the long-run real exchange rate based on the influence of sectoral productivities and commodity prices. The empirical analysis finds that both variables exert a significant long-run effect. However, the relation for the real exchange rate has shifted as the effect of each variable has become stronger and a positive trend is present since 1990. The effect of productivity, moreover, is opposite to that predicted by the standard Balassa-Samuelson theory. An explanation of these findings is suggested based on a general-equilibrium model that includes differentiated traded manufactures and homogeneous commodities.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 45_13.

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Date of creation: Aug 2013
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Handle: RePEc:rim:rimwps:45_13
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  1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2004. "International risk-sharing and the transmission of productivity shocks," Working Paper Series 0308, European Central Bank.
  2. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc.
  3. Ramzi Issa & Robert Lafrance & John Murray, 2008. "The turning black tide: energy prices and the Canadian dollar," Canadian Journal of Economics, Canadian Economics Association, vol. 41(3), pages 737-759, August.
  4. Ehsan U. Choudhri & Lawrence L. Schembri, 2010. "Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa-Samuelson Hypothesis Revisited," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 924-936, November.
  5. Amano, Robert A. & van Norden, Simon, 1995. "Terms of trade and real exchange rates: the Canadian evidence," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 83-104, February.
  6. Kenneth Rogoff & Barbara Rossi & Yu-chin Chen, 2008. "Can Exchange Rates Forecast Commodity Prices?," 2008 Meeting Papers 540, Society for Economic Dynamics.
  7. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
  8. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
  9. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  10. Hertel, Thomas & Hummels, David & Ivanic, Maros & Keeney, Roman, 2007. "How confident can we be of CGE-based assessments of Free Trade Agreements?," Economic Modelling, Elsevier, vol. 24(4), pages 611-635, July.
  11. Lee, Chia-Hao & Chou, Pei-I, 2013. "The behavior of real exchange rate: Nonlinearity and breaks," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 125-133.
  12. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics.
  13. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  14. Ferreira Filipe, Sara, 2012. "Equity order flow and exchange rate dynamics," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 359-381.
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