Do Long-Run Productivity Differentials Explain Long-Run Real Exchange Rates?

46 Pages Posted: 15 Feb 2006

See all articles by Patrick K. Asea

Patrick K. Asea

affiliation not provided to SSRN

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Date Written: May 1994

Abstract

We develop a two-country, balanced-growth intertemporal general equilibrium model to examine two predictions of the Balassa-Samuelson model, namely that (i) productivity differentials determine the domestic relative price of nontradables and (ii) deviations from purchasing power parity reflect differences in the relative price of nontradables. In our model, the equilibrium relative price of nontradables along the long-run balanced-growth path is determined by the ratio of the marginal products of labor in the tradable and nontradable sectors. The empirical relevance of the Balassa-Samuelson predictions is examined using the Hodrick-Prescott filter to extract long-run components from a panel database for fourteen OECD countries. The evidence indicates that labor productivity differentials do explain long-run, cross-country differences in relative prices. The predicted relative prices, however, are of little help in explaining long-run deviations from purchasing power parity.

JEL Classification: F41

Suggested Citation

Asea, Patrick K. and Mendoza, Enrique G., Do Long-Run Productivity Differentials Explain Long-Run Real Exchange Rates? (May 1994). Available at SSRN: https://ssrn.com/abstract=883536 or http://dx.doi.org/10.2139/ssrn.883536

Patrick K. Asea (Contact Author)

affiliation not provided to SSRN

No Address Available

Enrique G. Mendoza

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

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