Balassa, Bela, 1964, “The Purchasing Power Parity Doctrine: A reappraisal,” Journal of Political Economy No. 72, December, pp. 584–96.
Baltagi, Badi H., and Chihwa Kao, 2000, “Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey,” Syracuse University mimeo.
Benigno, Gianluca, and Christoph Thoenissen, 2002, “Equilibrium Exchange Rates and Supply-Side Performance,” Bank of England Working Paper, http://www.bankofengland.co.uk/index.html.
Canzoneri, Matthew B., Robert E. Cumby, and Behzad Diba, 1999, “Relative Labor Productivity and The Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries,” Journal of International Economics No. 47, pp. 245–266.
Cheung, Yin-Wong, Menzie Chinn, and Eiji Fujii, 1999, “Market Structure and the Persistence of Sectoral Real Exchange Rates,” International Journal of Finance and Economics 6 (2), April 2001.
Chinn, Menzie D., and Louis D. Johnston, 1999, “The Impact of Productivity Differentials on Real Exchange Rates: Beyond the Balassa-Samuelson Framework,” (University of California: Santa Cruz) mimeo.
Corsetti, Giancarlo, and Luca Dedola, 2002, “Macroeconomics of International Price Discrimination,” mimeo, Yale University, http://aida.econ.yale.edu/~corsetti/.
De Gregorio, Jose, Alberto Giovannini, and Holger C. Wolf, 1994, “International Evidence on Tradables and Nontradables Inflation,” European Economic Review No. 38, pp. 1225–1244.
Fitgerald, Doireann, 2003, “Terms-of-Trade Effects, Interdependence and Cross-Country Differences in Price Levels,” Harvard University, Mimeo.
Hsieh, David A., 1982, “The Determination of the Real Exchange Rate: The Productivity Approach,” Journal of International Economics No. 12, pp. 355–362.
Isard, Peter, and Steven Symansky, 1996, “Long-Run Movements in Real Exchange Rates,” in Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region, IMF Occasional Paper No. 145 (Washington: International Monetary Fund).
Kao, Chihwa, 1999, “Suprious Regression and Residual-Based Tests for Cointegration in Panel Data,” Journal of Econometrics No. 90, pp. 1–44.
Kao, Chihwa, and Min-Hsien Chiang, 2000, “On the Estimation and Inference of A Cointegrated Regression in Panel Data, Nonstationary Panels, Panel Cointegration and Dynamic Panels,” Volume 15, pp. 179–222.
Kravis, Irving B., and Robert E. Lipsey, 1983, Toward an Explanation of National Price Levels, Princeton Studies in International Finance. Vol. 52.
MacDonald, Ronald, and Luca Ricci, 2001, “PPP and the Balassa-Samuelson Effect: The Role of the Distribution Sector,” IMF Working Paper 01/38 (Washington: International Monetary Fund).
MacDonald, Ronald, and Luca Ricci, 2002, “Purchasing Power Parity and New Trade Theory,” IMF Working Paper 02/32 (Washington: International Monetary Fund).
Mark, Nelson, and Dooggyu Sul, 2001, “Nominal Exchange Rates and Monetary Fundamentals: Evidence from a Small Post-Bretton Woods Panel,” Journal of International Economics 53, pp. 29-52.
Marston, Richard, 1987, “Real exchange rates and productivity growth in the United States and Japan,’’ in Real-Financial Linkages Among Open Economies ed. by S. Arndt and J.D. Richardson (Cambridge, Massachusetts: MIT Press).
Officer, Lawrence H., 1976, “The Productivity Bias in Purchasing Power Parity: An Econometric Investigation”, Staff Papers International Monetary Fund, No. 23, pp. 545–579.
Jaewoo Lee is with the Research Department of the International Monetary Fund; Man-Keung Tang is with the Economics Department of Harvard University. This paper grew out of the collaboration between two authors during Tang’s summer internship in the Research Department of the IMF. We thank Menzie Chinn, Joe Gagnon, Peter lsard, and Alessandro Rebucci for comments. The authors are solely responsible for any errors and misinterpretations.
A good survey is provided by Engel (2002). The surveyed papers did not aim to address the productivity effect on the real exchange rate, but make explicit the deviation from PPP.
Both measures of productivity have been used in the literature. Earlier papers relied on labor productivity, but more recent papers relied on TFP except for the paper by Canzoneri and others (1999), which used labor productivity as a more comprehensive measure of productivity. The distinction between the two measures of productivity has not received much attention, but our results show that the distinction is anything but inconsequential for the exchange rate analysis.
An observed difference in prices of goods produced in home and foreign markets does not necessarily invalidate the premise of HBS effect.
In the recent new open macro literature, the long-run non-neutrality of nominal shocks on the real exchange rate has been proved theoretically possible but its empirical magnitude is viewed to be limited.
Probably the most comprehensive model in this line of research can be found in Pesenti (2002), and Hunt and Rebucci (2003) applied a version of the model to analyze the effect of productivity shock on the U.S. exchange rate and current account for a particular parametrization. The full implication of that model under alternative parameter assumptions still remains to be investigated.
Two series that look least nonstationary are the differentials in real wages and in nontradable labor productivities.
Strictly speaking, this evidence does not preclude the HB effect, which can coexist with the NP effect. Section VII provides additional evidence for the NP effect and against the HB effect.
The literature has often assumed a Hicks-neutral TFP growth.
It would be useful to employ the IMF Global Economic Model (Pesenti 2002) to analyze the interaction between them, and with real exchange rates (three Q’s). Such investigation, which is beyond the scope of this paper, is one avenue for exploring the source of differences between labor productivity and TFP.
The role of the retail sector can be larger if retail prices were used instead of general deflators.