Panel data and productivity bias hypothesis

The productivity bias hypothesis claims that a relatively more productive country should experience a real appreciation in its currency. Previous researchers who tested the hypothesis employed primarily cross-sectional data and provided mixed support for the hypothesis. A number of time-series studies, however, have supported the hypothesis. In this article, we tested the hypothesis by employing panel data from 69 cross-sectional units (countries) over the 1960-90 period. The empirical results that strongly supported the hypothesis were not sensitive to model specification and estimation procedure. We also tested the relevance of other variables such as a measure of resource abundance and the black market premium in explaining the national price levels that confirmed previous research.