Productivity Demand Shocks And Asia-Pacific Real Exchange Rates

Abstract

The evidence for a productivity-based explanation for real exchange rate behavior of East Asian currencies is examined using sectoral output and employment data, relative prices and relative productivities for China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.  Time series regressions of the real exchange rate on relative productivity ratios indicate significant relationships for the Philippines, Hong Kong, Thailand, Singapore, Taiwan and Korea. Only when augmenting the regressions with real oil prices are significant relationships obtained for Indonesia and Japan.  Panel regression results are less supportive of a relative productivity view of real exchange rates except for Hong Kong, China and Thailand.  Surprisingly, government spending does not appear to be a determinant of real exchange rates except for the countries of Malaysia, the Philippines, Taiwan and Thailand.