Productivity shocks and real exchange rate: a reappraisal

We reappraise the relationship between productivity and equilibrium real exchangerates using a panel estimation framework that incorporates a large number ofcountries and importantly, a dataset that allows explicit consideration of the role ofnon-traded, as well as traded, sector productivity shocks in exchange ratedetermination. We find evidence of significant correlation between real exchangerates and productivity differentials in both sectors. But our finding of a significant rolefor the non-traded sector in exchange rate determination, and of a relatively largercorrelation between exchange rates and productivity shocks of a given size emanatingfrom this sector, represent clear contradictions of the widely cited...