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Federal Reserve Bank of Dallas
Globalization and Monetary Policy Institute Working Paper
The effects of news about future productivity on international relative prices: an empirical investigation
Deokwoo Nam
Jian Wang
Abstract

In this paper, we find that expected (news) and unexpected (contemporaneous) components of productivity changes have opposite effects on the U.S. real exchange rate. Following Barsky and Sims' (2010) identification method, we decompose US total factor productivity (TFP) into news and contemporaneous productivity changes. The US real exchange rate appreciates following a favorable news shock to TFP, while it depreciates in response to a positive contemporaneous shock. In addition, the identified news TFP shocks play a much more important role than the identified contemporaneous TFP shocks in driving the US real exchange rate. These findings provide empirical guidance to important international macroeconomic issues, such as the international transmission of productivity shocks and the modeling of exchange rate volatility.


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Deokwoo Nam & Jian Wang, The effects of news about future productivity on international relative prices: an empirical investigation, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper 64, 2010.
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Keywords: Business cycles ; Foreign exchange rates ; Productivity
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