Productivity and the Euro-Dollar Real Exchange Rate |
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Authors: | Vivien J Lewis |
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Institution: | (1) Center for Economic Studies, Catholic University Leuven, Naamsestraat 69, 3000 Leuven, Belgium |
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Abstract: | This paper analyses how productivity differentials between the United States and the euro area drive the euro-dollar real
exchange rate. We derive impulse responses from a two-sector new open economy macro (NOEM) model. These are used as sign restrictions
to identify a structural vector autoregression. Our results show that the Balassa–Samuelson effect, through traded sector
productivity shocks, is less important in explaining the variation in the euro-dollar exchange rate than are demand and nominal
shocks. In particular, productivity can explain part of the appreciation of the dollar in the late 1990s only to the extent
that it created a boost to aggregate demand in the United States.
JEL no. F41, F31 |
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Keywords: | Real exchange rate productivity vector autoregression |
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