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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. Chen, Yu-chin & Rogoff, Kenneth & Rossi, Barbara, 2008. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 08-03, Duke University, Department of Economics.
  2. 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.
  3. Hertel, Thomas & David Hummels & Maros Ivanic & Roman Keeney, 2003. "How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?," GTAP Working Papers 1324, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  4. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2004. "International Risk Sharing and the Transmission of Productivity Shocks," CEPR Discussion Papers 4746, C.E.P.R. Discussion Papers.
  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. Ferreira Filipe, Sara, 2012. "Equity order flow and exchange rate dynamics," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 359-381.
  7. 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.
  8. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
  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. 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.
  11. Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August.
  12. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  13. 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.
  14. Chaban, Maxym, 2009. "Commodity currencies and equity flows," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 836-852, September.
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