Productivity Bias Hypothesis: The Case of South Asia

The productivity bias hypothesis states that the countries with relative higher growth trajectory have a tendency for experiencing real appreciation in their domestic currencies as an outcome of a positive productivity shock. It has also been found in the literature that this phenomena is particularly more prominent in the non-tradable sector, which is predominantly service intensive in nature and mostly in the public or government sector. Several researchers have endeavored to scrutinize this, either using the cross section or time series frameworks for different countries. This paper has attempted to reexamine the hypothesis empirically where we have resorted to a random coefficient model which incorporates country and time specific productivity effects in a panel regression set-up for eight SAARC countries covering the time length 1970-2008 with five different panel specifications controlling for both country specific heterogeneity and time specific heterogeneity. The paper has come up with the conclusions that the hypothesis is not much eminent for South Asian Countries.