Disaggregated Spending and the Productivity Bias Hypothesis

According to the productivity bias hypothesis countries have a tendency for real appreciation in their domestic currency as a result of a productivity shock and the tendency is more pronounced in the non-tradable sectors. Balassa (1964) examines this thesis for 12 OECD countries in a cross section framework. This paper reexamines this empirically using a disaggregate data of consumption, investment, and government expenditures in a panel regression set-up. Using five different panel specifications and controlling for country specific heterogeneity, time specific heterogeneity, and openness this paper explores that the bias is more prominent in government sector compared to other component of aggregate spending.