Productivity and the Long-Run Real Exchange Rate

Abstract

This paper analyzes the relationship between productivity growth differentials and real exchange rate (RER) in Chile using three alternative methods. First, it calibrates with Chilean data a simple RER model that includes Balassa-Samuelson effect. Second, it uses time series data to estimate cointegrating vectors between RER and its fundamentals, including productivity differentials. Third, using a panel of 92 countries and data form 1960 to 1990, it studies the international evidence about the relationship between productivity and RER. The three methods yield surprisingly similar results. Explicitly considering the way in which the RER is measured in Chile, the paper shows that the annual appreciation due to productivity growth differential in Chile during the period 1990-1997 is between 0.7 and 0.9% per annum.