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Do Long-Run Productivity Differentials Explain Long-Run Real Exchange Rates?
Author: Patrick K. Asea and Mr. Enrique G. Mendoza
Series:
IMF Working Papers
Volume/Issue:
Volume 1994: Issue 060
Language:
English
Publication Date:
01 May 1994
DOI:
https://doi.org/10.5089/9781451847987.001
ISBN:
9781451847987
ISSN:
1018-5941
Pages:
46
Keywords:
WP; least squares; exchange rate; price of nontradables; relative price; GDP deflator; type model; productivity differential; Real exchange rates; Capital productivity; Productivity; Total factor productivity
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We develop a two-country, balanced-growth intertemporal general equilibrium model to examine two predictions of the Balassa-Samuelson model, namely that (i) productivity differentials determine the domestic relative price of nontradables and (ii) deviations from purchasing power parity reflect differences in the relative price of nontradables. In our model, the equilibrium relative price of nontradables along the long-run balanced-growth path is determined by the ratio of the marginal products of labor in the tradable and nontradable sectors. The empirical relevance of the Balassa-Samuelson predictions is examined using the Hodrick-Prescott filter to extract long-run components from a panel database for fourteen OECD countries. The evidence indicates that labor productivity differentials do explain long-run, cross-country differences in relative prices. The predicted relative prices, however, are of little help in explaining long-run deviations from purchasing power parity.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund