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

48 Pages Posted: 23 Jul 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

Giorgio Fazio

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Ronald MacDonald

University of Glasgow - Adam Smith Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 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.

Keywords: real exchange rates, productivity, Balassa-Samuelson model, terms of trade

JEL Classification: F410, F310

Suggested Citation

Bordo, Michael D. and Choudhri, Ehsan U. and Fazio, Giorgio and MacDonald, Ronald, The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered (July 22, 2014). CESifo Working Paper Series No. 4870, Available at SSRN: https://ssrn.com/abstract=2469732 or http://dx.doi.org/10.2139/ssrn.2469732

Michael D. Bordo

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

Giorgio Fazio

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 141 548 3866 (Phone)
+44 141 5525589 (Fax)

Ronald MacDonald (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

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