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The real exchange rate and the structure of aggregate production

Kohli, Ulrich ; Natal, Jean-Marc

In: Journal of Productivity Analysis, 2014, vol. 42, no. 1, p. 1-13

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    Title
    • The real exchange rate and the structure of aggregate production
    Author
    • Kohli, Ulrich. Department of Economics, University of Geneva, Boulevard du Pont d'Arve 40, 1211, Geneva 4, Switzerland
    • Natal, Jean-Marc. International Monetary Fund, Washington, DC, USA
    Document Type
    • Postprint
    Language
    • English
    Published in
    • Journal of Productivity Analysis, 2014, vol. 42, no. 1, p. 1-13. Springer US; http://www.springer-ny.com
    Other Version
    OAI-PMH Identifier
    • oai:doc.rero.ch:326075
    Summary
    This paper proposes a new, production theory approach to the determination of the real exchange rate, which is defined as the relative price of traded to nontraded goods as is common in the international trade literature. Using a Translog real GDI function that describes the aggregate technology of an open economy as a starting point, the real exchange rate can be formally derived as a function of domestic excess savings, the terms of trade, relative factor endowments and technological progress. Empirical results for Switzerland suggest that the main drivers of the real exchange rate are the terms of trade, followed by relative factor endowments. Contrary to conventional wisdom, the Balassa-Samuelson effect does not seem to play a significant role in explaining the long-term real appreciation of the Swiss franc.