Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102148
Authors: 
Bordo, Michael D.
Choudhri, Ehsan U.
Fazio, Giorgio
MacDonald, Ronald
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4870
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.
Subjects: 
real exchange rates
productivity
Balassa-Samuelson model
terms of trade
JEL: 
F41
F31
Document Type: 
Working Paper

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