Discussion Paper Series 2013-E-2

Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates

Robert Dekle

We tackle the important issue of what the appropriate trends in the real Yen-Dollar andRMB-Dollar are over time. Over the long-run, the real yen has been appreciating against the U.S. dollar; while the real RMB-dollar rate has been depreciating (until 1999). In this paper, we build a macroeconomic-trade model of Japan-U.S. trade on theone hand, and China-U.S. trade on the other. Our model is essentially a general equilibrium extension of the Balassa-Samuelson effect. We show that these long-run trends in the real yen-dollar and RMB-dollar rates in the data can be justified by our model.

Keywords: equilibrium real exchange rates; Balassa-Samuelson effect; structural transformation; sectoral change; productivity

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2013 Bank of Japan All Rights Reserved.

Home Japanese Home