Dynamic linkages between real exchange rates and real unit labour costs: evidence from 18 economies

ABSTRACT The article examines the long-run behaviour of real exchange rates based on the premises of classical political economy. Specifically, it investigates the dynamics between real exchange rates and real unit labour costs of tradable commodities for 18 developed and developing economies. The analysis is carried out by applying recent methods of panel data, while the short- and long-run dynamics are estimated based on the cross-sectional autoregressive distributed lag model. Our findings confirm the presence of short- and long-run effects of real unit labour costs on real exchange rates. Consequently, new and more effective foreign exchange rate policies may be designed.