Real Exchange Rates and Sectoral Productivity in the Eurozone

American Economic Review, 2018, 108(6), June, 1543 - 1581

Posted: 14 Apr 2019

See all articles by Martin Berka

Martin Berka

School of Economics and Finance, Massey University; Open-economy macroeconomics programme, CAMA, ANU; Asian Bureau of Finance and Economic Research

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: June 1, 2018

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.

JEL Classification: E12, E23, E24, F31, F33, F43

Suggested Citation

Berka, Martin and Devereux, Michael B. and Engel, Charles M., Real Exchange Rates and Sectoral Productivity in the Eurozone (June 1, 2018). American Economic Review, 2018, 108(6), June, 1543 - 1581, Available at SSRN: https://ssrn.com/abstract=3355037

Martin Berka (Contact Author)

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Open-economy macroeconomics programme, CAMA, ANU

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Michael B. Devereux

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