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Does Productivity Growth Appreciate the Real Exchange Rate?

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  • Jaewoo Lee
  • Man‐Keung Tang

Abstract

Revisiting the time‐honored link between productivity growth and the real exchange rate, we find that higher labor productivity tends to appreciate the real exchange rate, consistent with the traditional view. Contrary to the traditional view, however, we find that the positive productivity effect is transmitted through the relative price between tradable goods, rather than through the relative price between tradables and nontradables. Moreover, higher total factor productivity is found to often depreciate the real exchange rate. These latter two pieces of evidence, combined with the conceptual strength of total factor productivity over labor productivity as a productivity measure, call for further refinement of the conventional view regarding the effect of productivity on the real exchange rate.

Suggested Citation

  • Jaewoo Lee & Man‐Keung Tang, 2007. "Does Productivity Growth Appreciate the Real Exchange Rate?," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 164-187, February.
    • Handle: RePEc:bla:reviec:v:15:y:2007:i:1:p:164-187
    DOI: 10.1111/j.1467-9396.2006.00628.x
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