Real Exchange Rate and the Productivity Growth Rates using Panel Data

Tsuyoshi Kubota

Doctoral Program in Policy and Planning Sciences, University of Tsukuba

Abstract

In this paper, we try to explain the fluctuation of real exchange rates using the Balassa-Samuelson (B-S) theory. According to the B-S theory, if a country has a higher productivity growth rate than does its trading partner, then the country's real exchange rate will appreciate. This paper is tested using panel data and the differences in the labor productivity growth rates of the tradable-goods and non-tradable sectors between two countries. The results may be summarized as follows. (1) The variation in the real exchange rate is affected by the between-country difference in the labor productivity growth rate of the non-tradable sector rather than that of the tradable sector. (2) In most countries, the expected signs hold.