We investigate the role of sectoral differences in labor productivity in explaining the process of structural transformation -the secular reallocation of labor across sectors -and the time path of aggregate productivity across countries. Using a simple model of the structural transformation that is calibrated to the growth experience of the United States, we measure sectoral labor productivity differences across countries. Productivity differences between rich and poor countries are large in agriculture and services and smaller in manufacturing. Moreover, over time, productivity gaps have been substantially reduced in agriculture and industry but not nearly as much in services. In the model, these sectoral productivity patterns generate implications that are broadly consistent with the cross-country evidence on the structural transformation, aggregate productivity paths, and relative prices. We show that productivity catch-up in industry explains about 50 percent of the gains in aggregate productivity across countries, while low relative productivity in services and the lack of catch-up explains all the experiences of slowdown, stagnation, and decline observed across countries.Keywords: labor productivity, structural transformation, sectoral productivity, employment, hours, cross-country data. JEL Classification: O1,O4. † We thank the editor and three referees for very useful and detailed comments. We also thank comments and suggestions from

This paper revisits the sticky-price pricing-to-market model of Devereux and Engel (2003), in which fixed exchange rates are optimal even in the face of country-specific nonmonetary shocks. We show that this result hinges critically on the Devereux-Engel model's prediction that international consumption levels are perfectly synchronized under flexible prices. Realistic modifications of the model that produce nonsynchronous consumption movements-such as, the presence of nontraded goods-upset the fixed exchange rate prescription even in the absence of an expenditure-switching role of exchange rate changes.

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This paper investigates the ability of a region participating in a currency union to a¤ect its in ‡ation di¤erential with respect to the union through …scal policy. We study the interaction between regional …scal policy and in ‡ation di¤erentials in a ‡exible price, two-region model with both traded and nontraded goods. For symmetric regions, changes in one region's tax rule that decrease the volatility of its in ‡ation di¤erential also decrease the volatility of its output. The decrease in the volatility of the in ‡ation di¤erential is brought about by an increase in the volatility of tax rates. The e¤ect of the tax rule on output volatility -but not in ‡ation volatility -depends on country size. For a small country lower volatility of in ‡ation di¤erentials is associated with higher volatility of output. This relationship results from the fact that small countries are more open, and hence there is a greater role for traded goods productivity shocks.

Empirical evidence suggests that movements in international relative prices are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods play an important role in the context of an otherwise standard open-economy macro model. Our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.