Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153480
Authors: 
Peltonen, Tuomas A.
Sager, Michael
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1046
Abstract: 
We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination. We find evidence of significant correlation between real exchange rates and productivity differentials in both sectors. But our finding of a significant role for the non-traded sector in exchange rate determination, and of a relatively larger correlation between exchange rates and productivity shocks of a given size emanating from this sector, represent clear contradictions of the widely cited Balassa-Samuelson hypothesis. Our findings remain valid in the face of a number of robustness tests, including the exchange rate regime and numéraire currency.
Subjects: 
Balassa-Samuelson
Emerging market economies
exchange rate
panel data
productivity
JEL: 
F31
O47
C23
Document Type: 
Working Paper

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