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Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?

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  • Vladislav Flek
  • Lenka Marková
  • Jiøí Podpiera

Abstract

Using panel data for selected national economies, we estimate relative price changes stemming from fluctuations in sectoral productivity. Subsequently, we calculate the cross-country CPI-inflation differentials implied by sectorally unbalanced productivity growth, taking into account country-specific weights of nontradables in consumption (value added) and assuming there are no adjustments in nominal exchange rates. We find that sectoral productivity developments have a statistically significant impact on relative prices in the EU countries and also in the Czech Republic, but the magnitude of the impact is not as strong as the Balassa-Samuelson Effect (BSEF) would predict. The final impact of relative productivity on inflation (on the real exchange rate) is even weaker and, moreover, in the case of the Czech Republic the impact is negligible. Thus, contrary to the prevailing view, we question the meaning of the BSEF as a plausible explanatory variable of (equilibrium) real exchange rate determination in the Czech Republic. The same situation we simulate for the future, provided productivity growth in the traded sector does not accelerate dramatically.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 53 (2003)
Issue (Month): 3-4 (March)
Pages: 130-153

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Handle: RePEc:fau:fauart:v:53:y:2003:i:3-4:p:130-153

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Keywords: Balassa-Samuelson effect; cross-country inflation differentials; nominal and real convergence; real exchange rates;

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  1. Cumby, Robert & Diba, Behzad & Canzoneri, Matthew & Eudey, Gwen, 1998. "Trends in European Productivity: Implications for Real Exchange Rates, Real Interest Rates and Inflation Differentials," Working Papers 27, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo Group Munich.
  3. Balázs Egert, 2002. "Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
  4. Tyrväinen, Timo, 1998. "What Do We Know about Productivity Gaps and Convergence in EMU Economies?," Research Discussion Papers 31/1998, Bank of Finland.
  5. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. Tomás Holub & Martin Cihák, 2001. "Convergence of Relative Prices and Inflation in Central and Eastern Europe," IMF Working Papers 01/124, International Monetary Fund.
  7. Coricelli, Fabrizio & Jazbec, Bostjan, 2001. "Real Exchange Rate Dynamics in Transition Economies," CEPR Discussion Papers 2869, C.E.P.R. Discussion Papers.
  8. Vladislav Flek & Mojmír Hájek & Jaromír Hurník & Ladislav Prokop & Lenka Racková, 2001. "Supply-side performance and structure," Politická ekonomie, University of Economics, Prague, vol. 2001(6).
  9. Alberola, Enrique & Tyrväinen, Timo, 1998. "Is There Scope for Inflation Differentials in EMU? An Empirical Evaluation of the Balassa-Samuelson Model in EMU Countries," Research Discussion Papers 15/1998, Bank of Finland.
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