The Euro and the Productivity Puzzle: An Alternative Interpretation

Chinn, Menzie David; Alquist, Ron

doi:10.2139/ssrn.288986

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The Euro and the Productivity Puzzle: An Alternative Interpretation

UCSC Dept. of Economics Working Paper No. 501

25 Pages Posted: 30 Oct 2001

See all articles by Menzie David Chinn

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Ron Alquist

Financial Stability Oversight Council, U.S. Treasury

Date Written: October 2001

Abstract

This paper documents the evidence for a productivity based model of the Dollar/Euro real exchange rate over the 1985-2001 period. Cointegrating relationships between the real exchange rate and productivity, government spending and the real price of oil are estimated using the Johansen (1988) and Stock-Watson (1993) procedures. We find that each percentage point in the US-Euro area productivity differential results in a five percentage point real appreciation of the dollar. This finding is robust to the estimation methodology, the variables included in the regression, and the sample period. We conjecture that productivity-based models cannot explain the observed patterns with the standard set of assumptions, and describe cases in which the models can be reconciled with the observed data.

JEL Classification: F31, F41

Suggested Citation: Suggested Citation

Chinn, Menzie David and Alquist, Ron, The Euro and the Productivity Puzzle: An Alternative Interpretation (October 2001). UCSC Dept. of Economics Working Paper No. 501, Available at SSRN: https://ssrn.com/abstract=288986 or http://dx.doi.org/10.2139/ssrn.288986