the determination of real exchange rate-10外文电子书籍.pdfVIP

Journal of InternationalEconomics 12(1982)355-362. North-Holland Publishing Company THE DETERMINATION OF THE REAL EXCHANGE RATE The productivity approach David A. HSIEH* Graduate School ofBusiness,University of Chicago, Chicago. IL6M37, U.S.A. ReceivedJune 1981,revisedversion receivedJanuary 1982 This paper explains deviations of exchange rates from purchasing power parity with the differencesbetween countries of the relative growth rates of labor productivity between traded and nontraded sectors. Two cases are considered: Germany and Japan versus their respective major trading partners. The results show that the time series methodology yields a more favorableconfirmationof the productivitydifferentialmodel than the cross section regressionsin the literature. 1. Introduction In the absence of money illusion, a doubling of the domestic money stock (holding everything else fixed) should lead to a doubling of all domestic prices, including that of foreign currencies. But one must be careful when applying this proposition to analyze movements in the exchange rates. Aside from the distributional effects when money is not introduced in a neutral manner, there are also exogenous real shocks which may affect the exchange rate. If these real factors are as important in the determination of exchange rates as the nominal forces, then the so called ‘monetary approach’ can explain only part of the movement of exchange rates. This paper assumes that the exchange rate adjusts fully to all changes in traded