The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered

65 Pages Posted: 30 Jun 2014

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Ehsan U. Choudhri

Carleton University - Department of Economics

Georgio Fazio

University of Newcastle - Business School

Ronald MacDonald

University of Glasgow - Adam Smith Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2014

Abstract

Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.

Suggested Citation

Bordo, Michael D. and Choudhri, Ehsan U. and Fazio, Georgio and MacDonald, Ronald, The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered (June 2014). NBER Working Paper No. w20228. Available at SSRN: https://ssrn.com/abstract=2460570

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ehsan U. Choudhri

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario
Canada

Georgio Fazio

University of Newcastle - Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom

Ronald MacDonald

University of Glasgow - Adam Smith Business School ( email )

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