This paper provides new insights into the relationship between exchange rates and productivity developments for European Economies. We focus on the question whether productivity changes have a long-run impact on real effective exchange rates for a large number of European Economies. Focusing on a sample period running from 1995 until 2013, we adopt a cointegrated VAR approach and distinguish between long-run equilibrium, short-run dynamics and long-run impact of shocks. Our findings show that for several industrialized economies, real effective exchange rates and labor productivity are not related over the long-run. A possible explanation for this result is that wage developments do not reflect increases in labor productivity to a large degree, which prevents a transmission to the real effective exchange rate through the price channel. The results for CEECs are more encouraging since a positive impact of labor productivity on real effective exchange rate is frequently observed.
- real effective exchange rates