Working Paper: NBER ID: w20228
Authors: Michael D. Bordo; Ehsan U. Choudhri; Giorgio Fazio; Ronald MacDonald
Abstract: Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.
Keywords: Real Exchange Rate; Balassa-Samuelson Effect; Productivity; Trade Costs; Monetary Regimes
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Regimes (E42) | Productivity Effect (D24) |
| Trade Costs (F19) | Productivity Effect (D24) |
| Terms of Trade (F14) | Productivity Effect (D24) |
| Productivity Effect (D24) | Real Exchange Rate Deviations (F31) |
| Elasticity of Substitution (D11) | Productivity Effect (D24) |
| Productivity (O49) | Real Exchange Rate (F31) |