We are very grateful to Elisabetta Falcetti, Enrique Mendoza, Jonathan Ostry, Sam Ouliaris, Peter Pedroni, Alessandro Prati, IMF colleagues, participants in an IMF seminar, and especially Ken West and two anonymous referees for useful comments. Giang Do, Sarma Jayanthi, Jungjin Lee, and Fei Liu provided excellent research assistance. We are also indebted to Jean Salvati for writing a STATA routine that performs dynamic OLS. This paper should not be reported as representing the views of the IMF. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.
Real Exchange Rates and Fundamentals: A Cross-Country Perspective
Article first published online: 11 JUL 2013
© 2013 International Monetary Fund
Journal of Money, Credit and Banking
Volume 45, Issue 5, pages 845–865, August 2013
How to Cite
RICCI, L. A., MILESI-FERRETTI, G. M. and LEE, J. (2013), Real Exchange Rates and Fundamentals: A Cross-Country Perspective. Journal of Money, Credit and Banking, 45: 845–865. doi: 10.1111/jmcb.12027
- Issue published online: 11 JUL 2013
- Article first published online: 11 JUL 2013
- Manuscript Accepted: 28 APR 2011
- Manuscript Received: 11 AUG 2008
- real exchange rate;
- terms of trade;
- Balassa–Samuelson effect
This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the consumer price index-based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets, government consumption, and trade restrictions tend to be associated with appreciating real exchange rates.