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Modeling the real exchange rate: looking for evidence of wage-share effect

Author

Listed:
  • Verónica De Jesús Romo

    (Universidad Juárez Autónoma de Tabasco, Cunduacán, Mexico)

  • Julio López Gallardo

    (Universidad Nacional Autónoma de México, Mexico City, Mexico)

Abstract

In this paper we study the determinants of the real exchange rate (RER), analysing in particular its association with the share of wages in output. We model the behavior of the RER against the US dollar of the domestic currency of three countries: Mexico, Korea, and France. We specify econometric vector autoregression (VAR) models and find for each country a long-run relation for the RER. In the three cases, we identify a negative association between the RER and the wage share and the RER, and the difference between the domestic and the US nominal interest rate. We also find that the RER is positively associated with labor productivity in Korea and France, but negatively associated in Mexico. We then suggest theoretical reasons for the type of associations found. As a corollary, we discuss the reasons that may explain why the RER tends to return to a long-run ‘normal’ value.

Suggested Citation

  • Verónica De Jesús Romo & Julio López Gallardo, 2020. "Modeling the real exchange rate: looking for evidence of wage-share effect," Review of Keynesian Economics, Edward Elgar Publishing, vol. 8(2), pages 178-194, April.
    • Handle: RePEc:elg:rokejn:v:8:y:2020:i:2:p178-194
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    More about this item

    Keywords

    real exchange rate; income distribution; cointegrated VAR; labor productivity; interest rates; Mexico; France; South Korea;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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