Real Exchange Rates and Sectoral Productivity in the Eurozone
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.
Devereux's research is supported by ESRC Award Number ES/I024174/1 and SSHRC. Engel acknowledges research support from National Science Foundation grant no. 1226007. The authors would like to thank discussants at the conference on Exchange Rates and External Adjustment, CEPR and SNB, Zurich, August 2012; the RBNZ; Hitotsubashi University; the conference on Renminbi and Global Economy, CUHK, May 2013; the 5th Bi-Annual Bank of Canada/ECB conference on 'Exchange Rates: A Global Perspective', ECB, Frankfurt, June 2013; The Bank of Canada Annual Research Conference, November 2013; the Bank of France; UC Irvine; Penn State University; University of Kyoto; the Missouri Economics Conference, March 2014; the ABFER Conference, Singapore 2014; the Sheffield Workshop in Macroeconomics, May 2014; and the XXIX Annual Economic Meeting, Central Bank of Uruguay, August 2014. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Martin Berka & Michael B. Devereux & Charles Engel, 2018. "Real Exchange Rates and Sectoral Productivity in the Eurozone," American Economic Review, vol 108(6), pages 1543-1581. citation courtesy of