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The Balassa–Samuelson Effect in a Developing Country

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  • Karine Gente

Abstract

Some Asian countries experience small real exchange rate appreciations or even a real depreciation despite a fast growth in tradable productivity. A key‐characteristic of these countries is that they are constrained on capital inflows. Is the Balassa–Samuelson theory still valid in those countries? Are there other factors likely to explain real exchange rate (RER) changes? To address these questions, we develop a two‐sector model in which a small open economy faces a constraint on capital inflows. In this setting, the RER does not only depend on productivity, but also on other factors like the rate of time preference, the age dependency ratio or the level of the external constraint. A calibration of the constrained economy model seems to match at least qualitatively empirical evidence for China, Hong Kong, Indonesia, Malaysia, Thailand, and Singapore, between 1970 and 1992.

Suggested Citation

  • Karine Gente, 2006. "The Balassa–Samuelson Effect in a Developing Country," Review of Development Economics, Wiley Blackwell, vol. 10(4), pages 683-699, November.
    • Handle: RePEc:bla:rdevec:v:10:y:2006:i:4:p:683-699
    DOI: 10.1111/j.1467-9361.2006.00342.x
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    References listed on IDEAS

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    4. Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues, pages 109-132, National Bureau of Economic Research, Inc.
    5. Ito, Takatoshi & Krueger, Anne O. (ed.), 1999. "Changes in Exchange Rates in Rapidly Developing Countries," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226386737, December.
    6. Takatoshi Ito & Anne O. Krueger, 1999. "Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues," NBER Books, National Bureau of Economic Research, Inc, number ito_99-1, July.
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    Cited by:

    1. Christopoulos, Dimitris K. & Gente, Karine & León-Ledesma, Miguel A., 2012. "Net foreign assets, productivity and real exchange rates in constrained economies," European Economic Review, Elsevier, vol. 56(3), pages 295-316.
    2. Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.
    3. Njindan Iyke, Bernard & Odhiambo, Nicholas M., 2017. "An empirical test of the Balassa-Samuelson hypothesis: Evidence from eight middle-income countries in Africa," Economic Systems, Elsevier, vol. 41(2), pages 297-304.
    4. Lopcu, Kenan & Dülger, Fikret & Burgaç, Almıla, 2013. "Relative productivity increases and the appreciation of the Turkish lira," Economic Modelling, Elsevier, vol. 35(C), pages 614-621.

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