Working PaPer SerieS. Productivity ShockS and real exchange rates a reappraisal. no 1046 / april by Tuomas A. Peltonen and Michael Sager

Transcription

1 Working PaPer SerieS no 1046 / april 2009 Productivity ShockS and real exchange rates a reappraisal by Tuomas A. Peltonen and Michael Sager

2 WORKING PAPER SERIES NO 1046 / APRIL 2009 PRODUCTIVITY SHOCKS AND REAL EXCHANGE RATES A REAPPRAISAL 1 by Tuomas A. Peltonen 2 and Michael Sager 3 In 2009 all publications feature a motif taken from the 200 banknote. This paper can be downloaded without charge from or from the Social Science Research Network electronic library at 1 We are grateful to Menzie Chinn, Marcel Fratzscher, Christian Thimann and an anonymous referee for insightful comments on an earlier draft. A draft of this paper was completed while Sager was employed as Senior Economist at the. The opinions expressed herein are those of the authors and do not necessarily reflect those of the European Central Bank, Wellington Management or University of Warwick. 2 European Central Bank, Kaiserstrasse 29, D Frankfurt am Main, Germany; tuomas.peltonen@ecb.europa.eu 3 Wellington Management, 75 State Street, Boston, MA 02109, USA and University of Warwick, Coventry CV4 7AL, UK; mjsager@wellington.com

3 European Central Bank, 2009 Address Kaiserstrasse Frankfurt am Main, Germany Postal address Postfach Frankfurt am Main, Germany Telephone Website Fax All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the or the author(s). The views expressed in this paper do not necessarily refl ect those of the European Central Bank. The statement of purpose for the Working Paper Series is available from the website, eu/pub/scientific/wps/date/html/index. en.html ISSN (online)

4 CONTENTS Abstract 4 Non-technical summary 5 1 Introduction 7 2 Theoretical framework 9 3 Data description & estimation methodology 12 4 Empirical results 16 5 Conclusions 21 References 22 Tables and figures 27 European Central Bank Working Paper Series 47 April

5 Abstract We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination. We find evidence of significant correlation between real exchange rates and productivity differentials in both sectors. But our finding of a significant role for the non-traded sector in exchange rate determination, and of a relatively larger correlation between exchange rates and productivity shocks of a given size emanating from this sector, represent clear contradictions of the widely cited Balassa-Samuelson hypothesis. Our findings remain valid in the face of a number of robustness tests, including the exchange rate regime and numéraire currency. Keywords: Exchange rate, productivity, Balassa-Samuelson, panel data, emerging market economies JEL Classification: F31, O47, C23 4 April 2009

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48 European Central Bank Working Paper Series For a complete list of Working Papers published by the, please visit the s website ( 989 Modelling loans to non-financial corporations in the euro area by C. Kok Sørensen, D. Marqués-Ibáñez and C. Rossi, January Fiscal policy, housing and stock prices by A. Afonso and R. M. Sousa, January The macroeconomic effects of fiscal policy by A. Afonso and R. M. Sousa, January FDI and productivity convergence in central and eastern Europe: an industry-level investigation by M. Bijsterbosch and M. Kolasa, January Has emerging Asia decoupled? An analysis of production and trade linkages using the Asian international input-output table by G. Pula and T. A. Peltonen, January Fiscal sustainability and policy implications for the euro area by F. Balassone, J. Cunha, G. Langenus, B. Manzke, J. Pavot, D. Prammer and P. Tommasino, January Current account benchmarks for central and eastern Europe: a desperate search? by M. Ca Zorzi, A. Chudik and A. Dieppe, January What drives euro area break-even inflation rates? by M. Ciccarelli and J. A. García, January Financing obstacles and growth: an analysis for euro area non-financial corporations by C. Coluzzi, A. Ferrando and C. Martinez-Carrascal, January Infinite-dimensional VARs and factor models by A. Chudik and M. H. Pesaran, January Risk-adjusted forecasts of oil prices by P. Pagano and M. Pisani, January Wealth effects in emerging market economies by T. A. Peltonen, R. M. Sousa and I. S. Vansteenkiste, January Identifying the elasticity of substitution with biased technical change by M. A. León-Ledesma, P. McAdam and A. Willman, January Assessing portfolio credit risk changes in a sample of EU large and complex banking groups in reaction to macroeconomic shocks by O. Castrén, T. Fitzpatrick and M. Sydow, February Real wages over the business cycle: OECD evidence from the time and frequency domains by J. Messina, C. Strozzi and J. Turunen, February Characterising the inflation targeting regime in South Korea by M. Sánchez, February Labor market institutions and macroeconomic volatility in a panel of OECD countries by F. Rumler and J. Scharler, February Understanding sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition by P. Du Caju, C. Fuss and L. Wintr, February Sequential bargaining in a new-keynesian model with frictional unemployment and staggered wage negotiation by G. de Walque, O. Pierrard, H. Sneessens and R. Wouters, February Aril

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