Real Exchange Rates and Productivity: Evidence From Asia

Yan, Isabel K. and Kakkar, Vikas (2011): Real Exchange Rates and Productivity: Evidence From Asia. Forthcoming in: Journal of Money, Credit & Banking

Abstract

This paper examines a productivity-based explanation of the long run real exchange rate movements of six Asian economies. Using industry level data, we construct total factor productivities (TFPs) for the tradable and nontradable sectors. We find that (a) within each country the relative price of nontradable goods is cointegrated with the sectoral TFP differential, and (b) the real exchange rates are cointegrated with the home and foreign sectoral TFP differentials. Using the predicted real exchange rate as a measure of the "long-run equilibrium", we find that most Asian economies�real exchange rates are overvalued before the Asian Financial Crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nontraded Goods; Balassa-Samuelson Model; Cointegration
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Alba, Joseph D., and David H., Papell. (2007) "Purchasing Power Parity and Country Characteristics: Evidence From Panel Data Tests,"Journal of Development Economics, 83, 240-251.

Balassa, Bela. (1964) "The Purchasing-Power Parity Doctrine: A Reappraisal,"Journal of Political Economy, 51, 584-596.

Bernanke, Ben., and Refet S., Gurkaynak. (2001) "Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously,"NBER Working Paper 8365, NBER, Cambridge.

Betts, Caroline., and Timothy Kehoe. (2006) "U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations,"Journal of Monetary Economics, 53, 1297-1326.

Bosworth, Barry. (2005) "Economic Growth in Thailand: The Macroeconomic Context,"The Brookings Institution.

Breitung, Jőrg. (2000) "The Local Power of Some Unit Root Tests for Panel Data,"Advances in Econometrics, 15, 161-178.

Burstein, Ariel., Martin Eichenbaum, and Sergio Rebelo. (2005a) "Large Devaluations and the Real Exchange Rate,"Journal of Political Economy, 113(4), 742-784.

Burstein, Ariel., Martin Eichenbaum, and Sergio Rebelo. (2005b) "The Importance of Nontradable Goods' Prices in Cyclical Real Exchange Rate Fluctuations,"NBER Working Paper 11699.

Chang, Yoosoon. (2004) "Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency,"Journal of Econometrics, 120, 263-293.

Chang, Yoosoon., Joon Y. Park, and Kevin Song. (2006) "Bootstrapping Cointegrating Regressions,"Journal of Econometrics, 133, 703-739.

Cheung, Yin-Wong., and K. S., Lai. (2000) "On Cross-Country Differences in the Persistence of Real Exchange Rates,"Journal of International Economics, 50, 375-397.

Chinn, Menzie D. (1996) "Asian Pacific Real Exchange Rates and Relative Prices," Manuscript, University of California, Santa Cruz.

Chinn, Menzie D. (2000) "The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates,"Review of International Economics, 8(1), 20-43.

Choudhri, Ehsan U., and Mohsin S., Khan. (2004) "Real Exchange Rates in Developing Countries: Are Balassa-Samuelson Effects Present?"IMF Working Paper.

Chow, Gregory C. (1993) "Capital Formation and Economic Growth in China,"The Quarterly Journal of Economics, 108(3), 809-42.

Crucini, Mario J., and Mototsugu Shintani. (2008) "Persistence in Law of One Price Deviations: Evidence from Micro-Data,"Journal of Monetary Economics, 55, 629-644.

De Gregorio, Jose., Alberto Giovannini, and Thomas Krueger. (1994) "The Behavior of Nontradable Goods Prices in Europe: Evidence and Interpretation,"Review of International Economics, 2, 284-305.

De Gregorio, Jose., Alberto Giovannini, and Holger C., Wolf. (1994) "International Evidence on Tradables and Nontradables Inflation,"European Economic Review, 38, 1225-1244.

DeLoach, Stephen B. (1997). "Do Relative Prices of Non-Traded Goods Determine Long-Run Real Exchange Rates," Canadian Journal of Economics, 30(4), 891-909.

Drine, Imed., and Christophe Rault. (2002) "Does the Balassa-Samuelson Hypothesis Hold for Asian Countries? An Empirical Analysis Using Panel Data Cointegration Tests,"William Davidson Working Paper Number 504, The William Davidson Institute.

Engel, Charles. (2000) "Long-run PPP May Not Hold After All,"Journal of International Economics, 57, 243-273.

Feenstra, Robert., and Hiau Looi Kee. (2004) "On the Measurement of Product Variety in Trade,"American Economic Review, 94(2), 145-149.

Garofalo, Gasper A., and Steven Yamarik. (2002) "Regional Convergence: Evidence from a New State-by-State Capital Stock Series,"Review of Economics and Statistics, 84(2), 316-323.

Gollin, Douglas. (2002) "Getting Income Shares Right,"Journal of Political Economy, 2002, 110(2), 458-474.

Im, Kyung So, M. Hashem Pesaran, and Yongcheol, Shin. (1995) "Testing for Unit Roots in Heterogeneous Panels," Manuscript, University of Cambridge.

_ _ _ _ _ _ _ (1997) "Testing for Unit Roots in Heterogeneous Panels," Manuscript, University of Cambridge.

_ _ _ _ _ _ _ (2003) "Testing for Unit Roots in Heterogeneous Panels,"Journal of Econometrics, 115, 53-74.

Ito, Takatoshi., Peter Isard, and Steven Symansky. (1999) "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia,"In Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice and Policy Issues, edited by Takatoshi Ito and Anne Krueger, Chicago: The University of Chicago Press.

Kakkar, Vikas. (2003) "The Relative Price of Nontraded-Goods and Sectoral Total Factor Productivity: An Empirical Investigation,"Review of Economics and Statistics, 85(2), 444-452.

Kakkar, Vikas., and Masao Ogaki. (1999) "Real Exchange Rates and Nontradables: A Relative Price Approach,"Journal of Empirical Finance, 6, 193-215.

Kakkar, Vikas., and Isabel K. Yan. (2011) "Real Exchange Rates and Productivity: Evidence From Asia", Working Paper, City University of Hong Kong.

Kao, Chihwa. (1999) "Spurious Regression and Residual-based Tests for Cointegration in Panel Data,"Journal of Econometrics, 90, 1-43.

Kim, J. I., and J. L., Lau. (1995) "The Role of Human Capital in the Economic Growth of the East Asian Newly Industrialized Countries,"Asia-Pacific Economic Review, 1(3), 3-22.

Levin, Andrew., and Chien-Fu Lin. (1993) "Unit Root Tests in Panel Data: New Results,"Working Paper, University of California, San Diego.

Levin, Andrew, Chien-Fu Lin and Chia-Shang James Chu. (2002) "Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties,", Journal of Econometrics, 108, 1-24.

Li, Kui-Wai. (2002) "Hong Kong's Productivity and Competitiveness in the Two Decades of 1980-2000," Working Paper, The City University of Hong Kong.

_ _ _ _ _ _ _ .(2006) The Hong Kong Economy: Recovering and Restructuring, McGraw Hill.

Maddala, G. S., and S. Wu. (1999) "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test,"Oxford Bulletin of Economics and Statistics, 61, 631-652.

Mark, Nelson C., and Donggyu Sul. (2003) "Cointegration Vector Estimation for Panel DOLS and Long Run Money Demand,"Oxford Bulletin of Economics and Statistics, 65, 655-680.

Mark, Nelson C., and Doo-Yull Choi. (1997) "Real Exchange-Rate Prediction Over Long Horizons,"Journal of International Economics, 43, 29-60.

Mark, Nelson C., Masao Ogaki, and Donggyu Sul. (2005) "Dynamic Seemingly Unrelated Cointegrating Regressions,"Review of Economic Studies, 72, 797-820.

Obstfeld, Maurice., and Kenneth Rogoff. (1996) Foundations of International Macroeconomics, The MIT Press, Cambridge, Massachusetts.

Ortega, D., and F. Rodriguez. (2006) "Are Capital Shares Higher in Poor Countries? Evidence from Industrial Surveys,"Wesleyan Economics WP, 23.

Park, Sungwook, and Masao Ogaki. (2007) "Long-Run Real Exchange Rate Changes and the Properties of the Variance of k-Differences," Ohio State University Working Paper #07-01, Department of Economics, Ohio State University.

Pedroni, Peter. (1999) "Critical Values for Cointegration Tests in Heterogeneous Panels With Multiple Regressors,"Oxford Bulletin of Economics and Statistics, November (Special Issue), 653-669.

Pedroni, Peter. (2004) "Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis,"Econometric Theory, 20, 597-625.

Samuelson, Paul. (1964) "Theoretical Notes on Trade Problems,"Review of Economics and Statistics, 46, 145-54.

Solow, Robert M. (1957) "Technical Change and the Aggregate Production Function,"Review of Economics and Statistics, 39, 312-20.

Stockman, Alan C., and Linda Tesar. (1995) "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Co-movements", American Economic Review, 85(1), 168-85.

The Economist. (2009) Pocket World in Figures, Profile Books, London.

Thomas, Alastair, and Alan King. (2008) "The Balassa-Samuelson Hypothesis in the Asia-Pacific Region Revisited,"Review of International Economics, 16(1), 127-141.