| Author/Presenter |
Yunfa Zhu (University of Manitoba) |
| Title |
Biased Productivity improvement, Terms of Trade and Equilibrium Real Exchange Rate |
| Abstract |
We formulate a "two country" model with three sectors in a general equilibrium framework to examine the determination of equilibrium real exchange rate, allowing for the both substitution between tradable goods produced domestically and abroad and substitution between tradable goods and non-tradable goods. Adopting comparative statics, we find that the productivity improvement in the production of tradable goods will leading to two opposing effects on equilibrium real exchange rate, worsening terms of trade and increasing relative price of non-tradable goods to tradable goods, ceteris paribus. The net effect on real exchange rate is theoretically ambiguous. However, on the precondition that the elasticity of substitution among tradable goods are much higher than the elasticity of substitution between tradable goods and non-tradable goods, the net effect of productivity improvement in tradable sector on the real exchange rate will be positive. That precondition is what that make the Harrod-Balassa-Samuelson Hypothesis hold and is also plausible in realistic economic situations. The empirical evidence is consistent with the prediction of the model by using the data set of 1975-2003 and 18 OECD countries. |
| Web Link |
http://economics.ca/2008/papers/0137.pdf |
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