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Real Exchange Rates and Sectoral Productivity in the Eurozone

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  • Martin Berka
  • Michael B. Devereux
  • Charles Engel

Abstract

We investigate the link between real exchange rates and sectoral TFP for eurozone countries. We show that real exchange rate variation, both cross-country and time-series, closely accords with an amended Balassa-Samuelson interpretation, incorporating sectoral productivity shocks and a labor market wedge. We construct a DSGE model to generate a cross section and time series of real exchange rates to compare to data. Estimates from simulated regressions are very similar to estimates for eurozone data. Our findings contrast with previous studies that have found little relationship between productivity and real exchange rates among high-income countries that have floating nominal exchange rates.

Suggested Citation

  • Martin Berka & Michael B. Devereux & Charles Engel, 2018. "Real Exchange Rates and Sectoral Productivity in the Eurozone," American Economic Review, American Economic Association, vol. 108(6), pages 1543-1581, June.
    • Handle: RePEc:aea:aecrev:v:108:y:2018:i:6:p:1543-81
    Note: DOI: 10.1257/aer.20151045
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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