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

July 1, 2003

Preview Citation

Format: Chicago

Jaewoo Lee, and Man-Keung Tang. Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?, (USA: International Monetary Fund, 2003) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Agroindustries, Economic sectors, Foreign exchange, Labor productivity, Production, Productivity, Real exchange rates, Total factor productivity

Keywords: Agroindustries, Asia and Pacific, HBS effect, Labor productivity, Labor productivity, Nontradable services, Productivity, Productivity differential, Productivity effect, Productivity improvement, Productivity measure, Real exchange rate, Real exchange rates, TFP differential, Total factor productivity, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/154
Stock No:

WPIEA1542003
ISBN:

9781451857252
ISSN:

1018-5941

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