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

Author/Editor:

Jaewoo Lee ; Man-Keung Tang

Publication Date:

July 1, 2003

Electronic Access:

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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.

Series:

Working Paper No. 2003/154

Subject:

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

English

Publication Date:

July 1, 2003

ISBN/ISSN:

9781451857252/1018-5941

Stock No:

WPIEA1542003

Pages:

40

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