Date: 2006
Type: Working Paper
Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism among G7 Countries
Working Paper, EUI ECO, 2006/39
CORSETTI, Giancarlo, DEDOLA, Luca, LEDUC, Sylvain, Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism among G7 Countries, EUI ECO, 2006/39 - https://hdl.handle.net/1814/6684
Retrieved from Cadmus, EUI Research Repository
This paper investigates the international transmission of productivity shocks
in a sample of ve G7 countries. For each country, using long-run restrictions,
we identify shocks that increase permanently domestic labor productivity in
manufacturing (our measure of tradables) relative to an aggregate of other
industrial countries including the rest of the G7. We find that, consistent
with standard theory, these shocks raise relative consumption, deteriorate net
exports, and raise the relative price of nontradables -in full accord with
the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of
the external account is fairly persistent, especially for the US. The response
of the real exchange rate and (our proxy for) the terms of trade differs across
countries: while both relative prices depreciate in Italy and the UK (smaller
and more open economies), they appreciate in the US and Japan (the largest
and least open economies in our sample); results are however inconclusive for
Germany. These findings question a common view in the literature, that a
country's terms of trade fall when its output grows, thus providing a mech-
anism to contain differences in national wealth when productivity levels do
not converge. They enhance our understanding of important episodes such
as the strong real appreciation of the dollar as the US productivity growth
accelerated in the second half of the 1990s. They also provide an empirical
contribution to the current debate on the adjustment of the US current ac-
count position. Contrary to widespread presumptions, productivity growth
in the US tradable sector does not necessarily improve the US trade deficit,
nor deteriorate the US terms of trade, at least in the short and medium run.
Cadmus permanent link: https://hdl.handle.net/1814/6684
ISSN: 1725-6704
Series/Number: EUI ECO; 2006/39