This paper examines the effect of overall and sector-specific productivity shocks on the real exchange rate in small open economies. A dynamic stochastic small open economy model shows that productivity shocks impact the real exchange rate mostly through changes in the relative price of...

Emerging Market economies have experienced periods of gradual and persistent appreciation in the real exchange rate, persistent current account deficits alongside high levels of foreign investment flows in an expansion phase followed by a contractionary phase of a sharp downward correction in...