Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?

40 Pages Posted: 28 Jan 2006

See all articles by Jaewoo Lee

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Man-Keung Tang

Harvard University - Harvard Faculty of Arts and Sciences

Date Written: July 2003

Abstract

We revisit the time-honored link between productivity and the real exchange rate. Consistent with the traditional view, we find that higher labor productivity tends to lead to appreciation of the real exchange rate. Contrary to the traditional view, however, we find that the positive productivity effect is transmitted through the real exchange rate based on tradable prices, rather than through relative prices between tradables and nontradables. Moreover, higher total factor productivity is found, if anything, to lead to depreciation of the real exchange rate. These last two pieces of evidence provide support for the emerging view that limited tradability of goods and services provides scope for the strategic pricing decision, which has material consequences for the aggregate real exchange rate.

Keywords: Real exchange rate, nontradable services, productivity

JEL Classification: F31, F41

Suggested Citation

Lee, Jaewoo and Tang, Man-Keung, Does Productivity Growth Lead to Appreciation of the Real Exchange Rate? (July 2003). IMF Working Paper, Vol. , pp. 1-40, 2003. Available at SSRN: https://ssrn.com/abstract=879230

Jaewoo Lee (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7331 (Phone)
202-623-6334 (Fax)

Man-Keung Tang

Harvard University - Harvard Faculty of Arts and Sciences ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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