Technological Improvements, the Real Exchange Rate and the Skill-Premium: a Unifying Approach

The present thesis explores the impact of technological shocks on the real exchange rate and the skill-premium within a unified framework that incorporates the key features of the Balassa-Samuelson and skill-premium hypotheses. A key result is that technological improvements in the skills-intensive traded good affect the real exchange rate in a different direction than improvements in the labour-intensive traded good. This result offers a plausible explanation of why empirical tests of the Balassa-Samuelson hypothesis produce mixed results. Our analysis also derives conditions required to generate a simultaneous appreciation of the real ex change rate and rise in the domestic skill-premium. It has been observed that skill-premium has increased in a wide range of countries. Our model suggests new conditions under which the skill-premium can increase in both home and foreign economies.;The second part of the present thesis uses panel-data econometric techniques to explore the impact of technological shocks on the real ex change rate. The results of our empirical tests offer partial support for our theoretical model. Consistent with the model, technological improvements in the skills-intensive and labour-intensive traded goods have different effects on the real exchange rate, and these effects have the right sign and are significant in tests based on procedures that seem more appropriate. Both the BalassaSamuelson model and our theoretical model predict that improvements in the non-tradable sector lead to the depreciation of the domestic currency. Surprisingly, the results of our empirical tests do not generally confirm this prediction.