Working Paper: NBER ID: w4807
Authors: Jos D. C. Gregorio; Holger C. Wolf
Abstract: The paper examines the effects of terms of trade movements and productivity differentials across sectors on the behavior of the real exchange rate. We develop a simple model of a small open economy producing exportable and nontradable goods and consuming importable and nontradable goods and present empirical evidence for a sample of fourteen OECD countries. The evidence broadly supports the predictions of the model, namely that faster productivity growth in the tradable relative to the nontradable sector and an improvement in the terms of trade induce a real appreciation.
Keywords: Terms of Trade; Productivity; Real Exchange Rate
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Faster productivity growth in the tradable sector (O49) | real appreciation of the currency (F31) |
| Improvements in terms of trade (F14) | real appreciation of the currency (F31) |
| Increased productivity in tradables (O49) | increased prices of nontradables (P22) |
| increased prices of nontradables (P22) | real appreciation of the currency (F31) |
| Productivity differentials (O49) | relative prices (P22) |
| Demand-side factors (R22) | relative prices (P22) |