Real Exchange Rates and Sectoral Productivity in the Eurozone

71 Pages Posted: 21 Oct 2014

See all articles by Martin Berka

Martin Berka

School of Economics and Finance, Massey University; Open-economy macroeconomics programme, CAMA, ANU; Asian Bureau of Finance and Economic Research

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: October 2014

Abstract

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.

Keywords: Balassa-Samuelson, Eurozone, Real Exchange Rates, Total Factor Productivity, Unit Labor Cost

JEL Classification: F31, F41

Suggested Citation

Berka, Martin and Devereux, Michael B. and Engel, Charles M., Real Exchange Rates and Sectoral Productivity in the Eurozone (October 2014). CEPR Discussion Paper No. DP10203, Available at SSRN: https://ssrn.com/abstract=2512731

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