This paper employs newly constructed measures for productivity
differentials, external imbalances, and commodity terms of trade to
estimate a panel cointegrating relationship between real exchange
rates and a set of fundamentals for a sample of 48 industrial
countries and emerging markets. It finds evidence of a strong
positive relation between the CPI-based real exchange rate and
commodity terms of trade. The estimated impact of productivity
growth differentials between traded and nontraded goods, while
statistically significant, is small. Increases in net foreign
assets and in government consumption tend to be associated with
appreciating real exchange rates.
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