The Role of Productivity in Economic Growth and Equilibrium

This study reexamines the evidence for the Balassa-Samuelson effect for the 1985-2007 period.       Cointegrating relationships between the real exchange rate and productivity, real price of oil and government spending are estimated using the Johansen and Stock-Watson procedures. The findings show that for each percentage point in the US-Euro area productivity differential there is a three percentage point change in the real dollar/euro valuation.  These findings are robust to the estimation methodology, the variables included in the regression, and the sample period.  We suggest that economic disequilibrium can result in a decline in economic growth.  This study will utilize von Neumann’s “A Model of General Economic Equilibrium” as an economic equilibrium standard.