Productivity, commodity prices and the real exchange rate: The long-run behavior of the Canada¬タモUS exchange rate

Article history: Received 9 May 2012 Received in revised form 8 August 2013 Accepted 8 August 2013 Available online 27 August 2013 The paper examines the Canada–US real exchange rate since the early 1970s to test two popular explanations of the long-run real exchange rate based on the influence of sectoral productivities and commodity prices. The empirical analysis finds that both variables exert a significant long-run effect. However, the relation for the real exchange rate has shifted as the effect of each variable has become stronger and a positive trend is present since 1990. The effect of productivity, moreover, is opposite to that predicted by the standard Balassa–Samuelson theory. An explanation of these findings is suggested based on a general-equilibrium model that includes differentiated traded manufactures and homogeneous commodities. © 2013 Elsevier Inc. All rights reserved. JEL classification: F41 F31