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American Economic Review Vol. 108 No. 6 2018

Real Exchange Rates and Sectoral Productivity in the Eurozone

Martin Berka1; Michael B. Devereux2; Charles Engel3

1 Massey University, Private Bag 11 222, Palmerston North, 4442, New Zealand (email: ) · 2 University of British Columbia, 2328 West Mall, Vancouver, BC V6T 1Z4, Canada (email: ) · 3 Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706 (email: )

Abstract

We investigate the link between real exchange rates and sectoral TFP for eurozone countries. We show that real exchange rate variation, both cross-country and time-series, closely accords with an amended Balassa-Samuelson interpretation, incorporating sectoral productivity shocks and a labor market wedge. We construct a DSGE model to generate a cross section and time series of real exchange rates to compare to data. Estimates from simulated regressions are very similar to estimates for eurozone data. Our findings contrast with previous studies that have found little relationship between productivity and real exchange rates among high-income countries that have floating nominal exchange rates.

DOI
10.1257/aer.20151045
Volume
108
Issue
6
Pages
1543-1581
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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