The productivity bias hypothesis states that a relatively more productive country should experience a real appreciation of its currency. Most studies in the literature that have tested the hypothesis have employed cross-sectional data. Only a few studies have used time-series data and they have tested the hypothesis for only a small number of countries. In this paper the authors test the hypothesis by using time-series data over the 1960-90 period for a sample of 44 countries and with a relatively new method of cointegration known as the ARDL approach. For most countries there is strong evidence supporting the hypothesis. . We would like to thank two anonymous referees for their valuable comments. However, we alone are responsible for any errors.

Productivity differentials among countries are said to be one of the major sources that contribute to the deviation of the Purchasing Power Paritybased exchange rate from the equilibrium rate, hence the productivity bias hypothesis. Prior to last review article on the productivity bias hypothesis in 1976, almost all studies relied upon cross-sectional regression analysis. Since then, two groups of empirical studies have emerged. While one group has employed time-series data, the other one has used panel data. These two later groups have provided more support to the hypothesis than the earlier crosssectional studies. This paper reviews and criticizes each group separately and provides tables that summarize main features of each study.

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