Productivity Shocks And Real Exchange Rates In The Long-Run: Evidence For The G3 And EU Economies

Abstract

This paper analyses the relationship between productivity and real exchange rates in Japan, United States, Germany and the European Union.  Prior studies have revealed that productivity shocks have a minimum effect on real exchange rate fluctuations.  This paper shows that productivity shocks account for most of the long-run fluctuations in the real exchange rates when long-run equilibrium relationships of the fundamental variables are considered.  This would support empirical support of the Balassa Samuelson model where the main sources of long-run deviations for purchasing power parity are the differences in relative productivity.