THE USUAL SUSPECTS? PRODUCTIVITY AND DEMAND SHOCKS AND ASIA-PACIFIC REAL EXCHANGE RATES

THE USUAL SUSPECTS?
PRODUCTIVITY AND DEMAND SHOCKS AND
ASIA-PACIFIC REAL EXCHANGE RATES

Menzie David CHINN
University of California, Santa Cruz

Abstract

The evidence for a productivity-based explanation for real exchange rate behavior of East Asian currencies is examined. Using sectoral output and employment data, relative prices and relative productivities are calculated for China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Time series regressions of the real exchange rate on relative prices indicate a role for relative prices for Indonesia, Japan and Korea. When examining real exchange rates and relative productivity ratios, one finds a relationship for Japan, Malaysia, the Philippines. Only when augmenting the regressions with real oil prices are significant relationships obtained for Indonesia and Korea. Panel regression results are slightly more supportive of a relative price view of real exchange rates. However, the panel regressions incorporating productivity variables, as well as other demand side factors, are less encouraging, except for a small subset of countries (Indonesia, Japan, Korea, Malaysia and the Philippines). Surprisingly, government spending does not appear to be a determinant of real exchange rates in the region.

Keywords: real exchange rate, productivity, tradables, nontradables
JEL: F31, F41
Acknowledgements: I thank Peter Isard and the UCSC Brown Bag group for discussions that stimulated this research, and Yin-Wong Cheung and seminar participants at Mount Holyoke College for valuable comments.This paper was completed while the author was a visiting scholar at the Research Department of the Federal Reserve Bank of San Francisco. Faculty research funds of the University of California, Santa Cruz, are gratefully acknowledged.