Does Productivity Growth Appreciate the Real Exchange Rate?

24 Pages Posted: 31 Jan 2007

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

Abstract

Revisiting the time-honored link between productivity growth and the real exchange rate, we find that higher labor productivity tends to appreciate the real exchange rate, consistent with the traditional view. Contrary to the traditional view, however, we find that the positive productivity effect is transmitted through the relative price between tradable goods, rather than through the relative price between tradables and nontradables. Moreover, higher total factor productivity is found to often depreciate the real exchange rate. These latter two pieces of evidence, combined with the conceptual strength of total factor productivity over labor productivity as a productivity measure, call for further refinement of the conventional view regarding the effect of productivity on the real exchange rate.

Suggested Citation

Lee, Jaewoo and Tang, Man-Keung, Does Productivity Growth Appreciate the Real Exchange Rate?. Review of International Economics, Vol. 15, No. 1, pp. 164-187, February 2007. Available at SSRN: https://ssrn.com/abstract=960597 or http://dx.doi.org/10.1111/j.1467-9396.2006.00628.x

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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