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

Author

Listed:
  • Ehsan U. Choudhri

    (Department of Economics, Carleton University, Canada)

  • Lawrence L. Schembri

    () (Bank of Canada, Canada)

Abstract

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.

Suggested Citation

  • Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "Productivity, Commodity Prices and the Real Exchange Rate: The Long-Run Behavior of the Canada-US Exchange Rate," Working Paper series 45_13, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:45_13
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    References listed on IDEAS

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    Cited by:

    1. Berka, Martin & Devereux, Michael B. & Engel, Charles, 2014. "Real exchange rates and sectoral productivity in the Eurozone," Globalization and Monetary Policy Institute Working Paper 196, Federal Reserve Bank of Dallas.
    2. Fernanda Fuentes & Rodrigo Herrera & Adam Clements, 2016. "Modelling Extreme Risks in Commodities and Commodity Currencies," NCER Working Paper Series 115, National Centre for Econometric Research.

    More about this item

    Keywords

    Real exchange rates; Productivity; Commodity prices; Balassa-Samuelson model;

    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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