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

Author/Editor: Lee, Jaewoo | Tang, Man-Keung
Authorized for Distribution: July 1, 2003
Electronic Access: Free Full Text (PDF file size is 1,223KB)
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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. 03/154
Subject(s): Productivity | Real effective exchange rates | Prices | Labor
Author's keyword(s): Real exchange rate | nontradable services | productivity
 
English  
    Published:   July 1, 2003        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1542003   Pages:   39
    Price:   US$15.00
       
     
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