Working Paper: NBER ID: w1922
Authors: Richard C. Marston
Abstract: Real exchange rates between the yen and dollar based on general price indexes overestimate the competitiveness of the United States relative to Japan. High productivity growth in the traded sector of the Japanese economy results in a continuous fall in the prices of traded goods relative to nontraded goods in Japan. In order to keep U.S. traded goods competitive, the real exchange rate based on general price series like the GDP deflator or the CPI index must continually fall resulting in a real appreciation of the yen.This paper provides estimates of how far real exchange rates based on general price series would have had to fall over the 1973-83 period in order to keep U.S. traded goods competitive. The real exchange rate based on GDP deflators, for example, would have had to fall by 38% relative to the real exchange rate based on unit labor costs in the traded sector. The GDP series remained roughly constant over the period, thus giving the misleading impression that U.S. goods were still competitive despite a sharp rise in the relative price of U.S. traded goods. The paper also provides estimates of the relative wage changes which would have to occur to restore the competitiveness of U.S. traded goods.
Keywords: real exchange rates; productivity growth; Japan; United States
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity growth in Japan's traded sector (O49) | Continuous adjustment of real exchange rates (F31) |
| Continuous adjustment of real exchange rates (F31) | Maintain competitiveness of U.S. traded goods (F14) |
| Productivity growth in Japan's traded sector (O49) | Shift in relative prices (F16) |
| Shift in relative prices (F16) | Adjustments in real exchange rates (F31) |
| Nominal and real wages in the U.S. must decline relative to Japan's wages (F66) | Restore competitiveness of U.S. goods (F14) |