Question

Germany and Greece follow the euro, so the exchange rate is fixed. but the productivity of Germany is higher, productivity growth can be modelled as falling price levels because technology improvements will lead to cheaper production cost. Why will this imbalance in productivity cause issues with the fixed exchange rate and the stability of the euro?

Answer 1

Imbalance in productivity cause issues with the fixed exchange rate and the stability of the euro because the properties of real exchange rates in the Eurozone, where two-sided nominal exchange rates are fixed. It is notable from the writing on open economy macroeconomics that coasting nominal exchange rates are affected by money related arrangement choices and stuns, monetary stuns, and perhaps at the same time by non-essential stuns. At the point when nominal costs change more gradually than the nominal exchange rate, these stuns additionally impact the real exchange rate.

Real exchange rate among nations that share a typical money is more fruitful ground for discovering proof of the Balassa-Samuelson impact in light of the fact that the short-run real exchange rate developments are not driven by these money related and money related factors that impact nominal exchange rates.

An expansion in absolute factor productivity in exchanged merchandise is related with a real rate fulness, and an expansion in complete factor productivity in non-exchanged merchandise associates with a real devaluation. However, these connections show up just when we separately control for unit work cost differentials across nations. We find that, holding productivity steady, higher unit work costs lead to real exchange rate appreciation.