Note: Entry in each case is the correlation coefficient. *, **, *** indicate that the coefficient is significantly different from zero at 10, 5 and 1 percent level of significance, respectively. The correlations have been calculated using the data averaged over five-year periods.

We consider four real-exchange-rate measures. The first is the bilateral real exchange rate in purchasing-power-parity (PPP) terms, from Penn World Tables, vis-a-vis the United States (denoted “RER”). The second is based on the exchange rate misalignment adjusted for the Balasa-Samuelson effect. For this we regress the real exchange rate in PPP on real per-capita GDP and calendar-year fixed effects. The extent of misalignment is then calculated as the difference between the log real exchange rate and the log fitted value from the regression (as in Cheung, Chinn and Fujii (2009) and Rodrik (2009)). Third, we construct the bilateral real exchange rate with data from the International Monetary Fund’s _International Financial Statistics_ (IFS) on nominal exchange rates vis-a-vis the U.S. dollar and the consumer price index for the United States and other countries. Fourth and finally, we obtain an estimate of the real effective exchange rate from IFS and the _World Development Indicators_ of the World Bank. While this measure has the advantage of being multilateral rather than bilateral, country coverage is more limited.<sup>10</sup> Tables A1 and A2 in Appendix A show correlations between different exchange rate series. The correlation coefficients between different exchange rate series in levels (Table A1) are not very large, and only some of them are statistically significant. The correlations between percentage changes in different real exchange rate measures (Table A2), by comparison, are large and also statistically significant at the 1 percent level. In particular, the correlation between the two Penn World Table-based measures is quite high (0.99). More information on the sources of the data and construction of variables is in Appendix A.

# 3. **The Real Exchange Rate and Export Growth**

We now analyze the determinants of the growth of exports of merchandise and services. We contrast traditional and modern services. We consider different measures of the real exchange rate. We compare advanced and developing countries. And we allow the effect of RER changes to differ for depreciations and appreciations.

Our basic specification is in equation 1, where the dependent variable Xit is growth rate of exports of merchandise or services for country i in five-year period t.<sup>11</sup> The independent variables include log per capita income (averaged over the previous five-year period), and the percentage change in the real exchange rate. We estimate these regressions for a panel of

> 10 Rodrik (2009) tests the robustness of his results to using a bilateral Real Exchange Rate (RER) based on relative wholesale price indices, which we have not included for brevity. Yet another possibility would be to use the data on bilateral exports and bilateral exchange rate to estimate the effect of real exchange rate on exports growth. Such an exercise would have two benefits: endogeneity would be less of a concern, and measurement of bilateral exchange rate would be more precise.

> 11 We dropped outliers where export growth of merchandise, traditional or modern services exceeded 100 per cent. Some 20 observations were thus dropped.

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