The Effect of Labor Productivity on Real Exchange Rate: Evidence from Czech Republic, Hungary, Poland and Slovakia
The Effect of Labor Productivity on Real Exchange Rate: Evidence from Czech Republic, Hungary, Poland and Slovakia

Summary/Abstract: The paper builds on an intertemporal model of an open economy to formulate the hypothesis of the dependance of real exchange rate on labor productivity. The model is formulated under those assumption on which the Balassa-Samuelson theorem rests. The hypothesis is tested using cointegration technique and vector error correction model. Usually testing the Balassa-Samuelson effect gives mixed results, sometimes finding the opposite reaction of the real exchange rate to the one predicted by the Balassa-Samuelson theorem, pointing to the restrictive nature of the assumptions on which it is based. The analysis shows a little supportive evidence for the Balassa-Samuelson effect. However, according to the analysis the effect of labor productivity on the real exchange rate can hardly be considered as clear-cut as predicted by the Balassa-Samuelson theorem.

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