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Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?
Author:
Mr. Jaewoo Lee
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and
Man-Keung Tangnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 154
Language:
English
Publication Date:
01 Jul 2003
DOI:
https://doi.org/10.5089/9781451857252.001
ISBN:
9781451857252
ISSN:
1018-5941
Pages:
40
Keywords:
WP; productivity differential; HBS effect; Real exchange rate; nontradable services; productivity; labor productivity; TFP differential; productivity effect; productivity improvement; productivity measure; Real exchange rates; Total factor productivity; Labor productivity; Agroindustries; Asia and Pacific
Legal-disclaimer:
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 revisit the time-honored link between productivity and the real exchange rate. Consistent with the traditional view, we find that higher labor productivity tends to lead to appreciation of the real exchange rate. Contrary to the traditional view, however, we find that the positive productivity effect is transmitted through the real exchange rate based on tradable prices, rather than through relative prices between tradables and nontradables. Moreover, higher total factor productivity is found, if anything, to lead to depreciation of the real exchange rate. These last two pieces of evidence provide support for the emerging view that limited tradability of goods and services provides scope for the strategic pricing decision, which has material consequences for the aggregate real exchange rate.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 154