Working Paper: NBER ID: w20510
Authors: Martin Berka; Michael B. Devereux; Charles Engel
Abstract: We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns closely accord with an amended Balassa-Samuelson interpretation, both in cross-section and time series. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate.
Keywords: Real Exchange Rates; Sectoral Productivity; Eurozone; Balassa-Samuelson Effect
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor supply shocks (J20) | Real exchange rates (F31) |
| Total Factor Productivity (TFP) in traded goods (F16) | Real appreciation of the exchange rate (F31) |
| Total Factor Productivity (TFP) in nontraded goods (O49) | Real depreciation of the exchange rate (F31) |
| Unit labor costs (J39) | Real appreciation of the exchange rate (F31) |
| Productivity differentials (O49) | Real exchange rates (F31) |