THE HARROD–BALASSA–SAMUELSON HYPOTHESIS: REAL EXCHANGE RATES AND THEIR LONG-RUN EQUILIBRIUM

Authors

  • Yanping Chong,

    1. Winona State University, U.S.A.; Federal Reserve Bank of San Francisco and University of California, Davis, U.S.A.; University of Virginia and NBER, U.S.A., and CEPR, U.K.
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  • Òscar Jordà,

    1. Winona State University, U.S.A.; Federal Reserve Bank of San Francisco and University of California, Davis, U.S.A.; University of Virginia and NBER, U.S.A., and CEPR, U.K.
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  • Alan M. Taylor

    1. Winona State University, U.S.A.; Federal Reserve Bank of San Francisco and University of California, Davis, U.S.A.; University of Virginia and NBER, U.S.A., and CEPR, U.K.
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    • The views expressed in this article are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Jordà is grateful for the support from the Spanish MICINN National Grant SEJ2007-6309 and the hospitality of the Federal Reserve Bank of San Francisco during preparation of this manuscript. Taylor also gratefully acknowledges research support from the Center for the Evolution of the Global Economy at the University of California, Davis. We thank the editor and referees for helpful comments. All errors are ours. Please address correspondence to: Òscar Jordà, Economic Research, MS 1130, Federal Reserve Bank of San Francisco, 101 Market St., San Francisco, CA 94105. Phone: (415) 974-2691. Fax: (415) 974-2168. E-mail: oscar.jorda@sf.frb.org.


  • Manuscript received April 2010; revised January 2011.

Abstract

Frictions and perturbations may influence currency values in the short run, but it is generally acknowledged that real-exchange rates eventually settle toward equilibrium. The puzzle then is how gradually this parity is reached given the fluidity in foreign exchange markets. Persistent differences in the relative productivity of countries—a broad characterization of the Harrod–Balassa–Samuelson hypothesis—may help explain this puzzle. This article introduces methods to estimate equilibrium adjustment paths semiparametrically, and then sort how each of these components influences the dynamics of exchange rates. This is done in a dynamic panel setting by introducing novel local projections methods for cointegrated systems. Productivity shocks affect dynamics, and after adjusting for these factors, adjustment toward equilibrium is relatively rapid.

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