Real Exchange Rates and Productivity: Evidence from Asia

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. © 2012 The Ohio State University.