A Paradigm for Economic Growth for the 21st Century

This paper examines the evidence for a productivity based model of the dollar/euro real exchange rate for the period 1985-2007 period. Cointegrating relationships between the real exchange rate and productivity, real price of oil and government spending are estimated using the Johansen and Stock-Watson procedures. The findings show that for each percentage point in the US-Euro area productivity differential there is a three percentage point change in the real dollar/euro valuation. These findings are robust to the estimation methodology, the variables included in the regression, and the sample period This model will utilize von Neumann's "A Model of General Economic Equilibrium" as an economic equilibrium standard.