Abstract
This paper analyses the relationship between productivity and real exchange rates in Japan, United States, Germany and the European Union. Prior studies have revealed that productivity shocks have a minimum effect on real exchange rate fluctuations. This paper shows that productivity shocks account for most of the long-run fluctuations in the real exchange rates when long-run equilibrium relationships of the fundamental variables are considered. This would support empirical support of the Balassa Samuelson model where the main sources of long-run deviations for purchasing power parity are the differences in relative productivity.
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