Working Paper: NBER ID: w8824
Authors: Ron Alquist; Menzie D. Chinn
Abstract: This paper documents the evidence for a productivity based model of the dollar/euro real exchange rate over the 1985-2001 period. We estimate cointegrating relationships between the real exchange rate, productivity, and the real price of oil using the Johansen (1988) and Stock-Watson (1993) procedures. We find that each percentage point in the US-Euro area productivity differential results in a five percentage point real appreciation of the dollar. This finding is robust to the estimation methodology, the variables included in the regression, and the sample period. We conjecture that productivity-based models cannot explain the observed patterns with the standard set of assumptions, and describe a case in which the model can be reconciled with the observed data.
Keywords: No keywords provided
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 (O49) | US aggregate demand (E00) |
| US aggregate demand (E00) | real appreciation of the dollar (F31) |
| US-Euro area productivity differential (O49) | real price of oil (Q31) |
| government spending and asset returns (E62) | real exchange rate (F31) |
| US-Euro area productivity differential (O49) | real appreciation of the dollar (F31) |
| US-Euro area productivity differential (O49) | real exchange rate (F31) |
| real exchange rate (F31) | dollar appreciation (F31) |