Productivity and the ('Synthetic') Euro-Dollar Exchange Rate

37 Pages Posted: 1 Jun 2003

See all articles by Bernd Schnatz

Bernd Schnatz

European Central Bank (ECB)

Focco Vijselaar

affiliation not provided to SSRN

Chiara Osbat

European Central Bank (ECB)

Date Written: April 2003

Abstract

This paper analyses the impact of productivity developments in the United States and the euro area on the euro-dollar exchange rate. The paper presents a new measure of relative average labour productivity (ALP), which does not suffer from the biases implicit in readily available relative ALP data. Importantly, the patterns of these series differ widely. Employing the Johansen cointegration framework, four Behavioural Equilibrium Exchange Rate models are estimated using four different productivity proxies. Our results indicate that the extent to which productivity can explain the euro depreciation varies with the productivity proxy used: readily available measures explain most, our new, preferred measure least. If foreign exchange traders used the former to assess productivity developments, this might thus have contributed to the weakness of the euro in 2000/2001. In all models, however, productivity can explain only a fraction of the actual euro depreciation experienced in 1999/2000.

Keywords: Real exchange rate, euro, US dollar, average labour productivity, BEER, cointegration

JEL Classification: F31, C32, O47

Suggested Citation

Schnatz, Bernd and Vijselaar, Focco and Osbat, Chiara, Productivity and the ('Synthetic') Euro-Dollar Exchange Rate (April 2003). Available at SSRN: https://ssrn.com/abstract=411588

Bernd Schnatz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
069-1344-6517 (Phone)

Focco Vijselaar

affiliation not provided to SSRN

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

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