Terms of Trade, Productivity, and the Real Exchange Rate

Terms of Trade, Productivity, and the Real Exchange Rate
Author: Jose De Gregorio
Publisher:
Total Pages: 32
Release: 1994
Genre: Foreign exchange rates
ISBN:

The paper examines the effects of terms of trade movements and productivity differentials across sectors on the behavior of the real exchange rate. We develop a simple model of a small open economy producing exportable and nontradable goods and consuming importable and nontradable goods and present empirical evidence for a sample of fourteen OECD countries. The evidence broadly supports the predictions of the model, namely that faster productivity growth in the tradable relative to the nontradable sector and an improvement in the terms of trade induce a real appreciation.

Real Exchange Rate Levels, Productivity and Demand Shocks

Real Exchange Rate Levels, Productivity and Demand Shocks
Author: Menzie David Chinn
Publisher: International Monetary Fund
Total Pages: 33
Release: 1997-05-01
Genre: Business & Economics
ISBN: 1451962169

We investigate the long-run relationship between the real exchange rate, traded and nontraded productivity levels, and government spending for 14 OECD countries, using recently developed panel cointegration tests. The results indicate that under certain assumptions it is easier to detect cointegration in panel data than in the available time series; moreover, the rate of reversion to long-run equilibrium is estimated with greater precision. Using the model augmented by oil prices, we find that in 1991 (the last year productivity data are available) there is less overvaluation of the U.S. dollar than that implied by a naive version of purchasing power parity.

Accounting for U.S. Real Exchange Rate Changes

Accounting for U.S. Real Exchange Rate Changes
Author: Charles Engel
Publisher:
Total Pages: 68
Release: 1995
Genre: Consumer goods
ISBN:

This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of non-traded goods. The decomposition is done at all possible horizons that the data allow -- from one month up to thirty years. The accounting is performed with five different measures of non-traded goods prices and real exchange rates, for exchange rates of the U.S. relative to a number of other high income countries in each case. The outcome is surprising -- relative prices of non-traded goods appear to account for essentially none of the movement of U.S. real exchange rates at any horizon. Only for one crude measure, which uses the aggregate producer price index as an index of traded goods prices, do non-traded goods prices seem to account for more than a tiny portion of real exchange rate changes. This pattern appears to be true even during fixed nominal exchange rate episodes. Special attention is paid to the U.S. real exchange rate with Japan. The possibility of mismeasurement of traded goods prices is explored.

Exchange Rates and Trade

Exchange Rates and Trade
Author: Mr.Daniel Leigh
Publisher: International Monetary Fund
Total Pages: 52
Release: 2017-03-15
Genre: Business & Economics
ISBN: 147558749X

We examine the stability and strength of the relationship between exchange rates and trade over time using three alternative approaches, mitigating the endogeneity of the relation. We find that both exchange rate pass-through and the price elasticity of trade volumes are largely stable over time. Economic slack and financial conditions affect the relationship, but there is limited evidence that participation in global value chains has significantly changed the exchange rate–trade relationship over time.

Relative Labour Productivity and the Real Exchange Rate in the Long Run

Relative Labour Productivity and the Real Exchange Rate in the Long Run
Author: Matthew B. Canzoneri
Publisher:
Total Pages: 56
Release: 1996
Genre: Foreign exchange
ISBN:

The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, for a class of technologies including Cobb-Douglas, the model implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, the model assumes that purchasing power parity holds for traded goods in the long-run. We test each of these implications using data from a panel of OECD countries. Our results suggest that the first of these two fits the data quite well. In the long run, relative prices generally reflect relative labor productivities. The evidence on purchasing power parity in traded goods is considerably less favorable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. On the other hand, when we look at DM exchange rates purchasing power parity appears to be a somewhat better characterization of traded goods prices.

Uncertainty, Flexible Exchange Rates, and Agglomeration

Uncertainty, Flexible Exchange Rates, and Agglomeration
Author: Mr.Luca Antonio Ricci
Publisher: International Monetary Fund
Total Pages: 35
Release: 1998-02-01
Genre: Business & Economics
ISBN: 1451927355

This paper shows that exchange rate variability promotes agglomeration of economic activity. Under flexible rates, firms located in large markets have lower variability of sales, reinforcing concentration of firms there. Empirical evidence on OECD countries demonstrates (1) that the negative effect of country size on variability of industrial production is stronger after the 1973 collapse of fixed rates and (2) for small (large) countries, exchange rates variability has a long-run negative (positive) effect on net inward FDI flows. Two implications arise: creating a currency area fosters agglomeration in the area, and a two-stage EMU may exacerbate the current uneven regional development.

Economic Studies

Economic Studies
Author: OECD Staff
Publisher:
Total Pages: 226
Release: 1987
Genre: Business & Economics
ISBN: 9789264130272

Real Exchange Rates and Fundamentals

Real Exchange Rates and Fundamentals
Author: Luca Antonio Ricci
Publisher: International Monetary Fund
Total Pages: 32
Release: 2008
Genre: Business & Economics
ISBN:

This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the CPI-based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets and in government consumption tend to be associated with appreciating real exchange rates.