Real exchange rates and sectoral productivity in the Eurozone
We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns quite closely accord with an amended Balassa-Samuelson interpretation both in the cross-section and time series. We use a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be compared to the data. Under the assumption of a common currency, the model simulations closely accord with the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate.
AMERICAN ECONOMIC REVIEW, 2018, 108 (6), pp. 1543 - 1581