“…Thus, a sudden dollar appreciation (or a decline in the dollar price of a foreign currency) would lead to US prices which are also high relative to their equilibrium value, indicating overvaluation. This is essentially the logic behind a large body of research which studies the impact of exchange rates on the economy using the Balassa-Samuelson residual, including Frankel (2006), Rodrik (2008), Johnson, Ostry, and Subramanian (2010), Stahler and Subramanian (2014), Cheung, Chinn, and Fujii (2010), Nicita (2013), and Glüzmann et al (2012, 2013. While Balassa-Samuelson residuals may be an imperfect measure of competitiveness, these studies generally find that BS residuals are related to economic outcomes.…”