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Real Exchange Rates and Productivity: Evidence from Asia


  • We would like to thank, without implicating, Yoosoon Chang, Yin-Wong Cheung, Menzie Chinn, In Choi, David Cook, Charles Engel, Cheng Hsiao, Fred Kwan, Nelson Mark, and seminar participants at the Hong Kong University of Science and Technology, the Institute for Financial Management and Research, and all the participants of the Conference on International Financial Markets and the Macroeconomy held at the Hong Kong Institute for Monetary Research for helpful comments. We are very grateful to Editor Masao Ogaki and two anonymous referees of this journal for their comments that improved the paper substantially. We also thank Yoosoon Chang and Nelson Mark for sharing their GAUSS code.


This paper examines a productivity-based explanation of the long-run real exchange rate movements of six Asian economies. Using industry level data, we construct total factor productivities (TFPs) for the tradable and nontradable sectors. We find that (i) within each country the relative price of nontradable goods is cointegrated with the sectoral TFP differential, and (ii) the real exchange rates are cointegrated with the home and foreign sectoral TFP differentials. Using the predicted real exchange rate as a measure of the “long-run equilibrium,” we find that most Asian economies’ real exchange rates were overvalued before the Asian Financial Crisis.