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Can the Balassa-Samuelson theory explain long-run real exchange rate movements in OECD countries?

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Author Info
Imed Drine
Christophe Rault

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Abstract

This study tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for 12 OECD countries. New panel data cointegration techniques recently developed by Pedroni (2000) are applied and the results are compared with those obtained with conventional Johansen (1995)'s time series cointegration tests. Whereas standard time series approach turns out to be unable to put in evidence a significant long-run relationship is largely accepted for all countries using recent advances in the econometrics of non-stationary dynamic panels methods. This result doesn’t mean however that the BS is uniformly supported by data for all OECD countries, since actually four of them (Australia, Belgium, Canada and the USA) are proved not to follow the BS path. Closer examinations of the three key components of the BS hypothesis enable one to identify clearly the causes of this empirical failure. It is found that the absence of a positive long-run relationship between real exchange rate and the relative prices of non-traded goods is the reason for this rejections. A possible explanation is that the PPP may not be confirmed for tradable goods in these countries.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 8 (May)
Pages: 519-530
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Handle: RePEc:taf:apfiec:v:15:y:2005:i:8:p:519-530

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  7. Bahmani-Oskooee, Mohsen, 1992. "A Time-Series Approach to Test the Productivity Bias Hypothesis in Purchasing Power Parity," Kyklos, Blackwell Publishing, vol. 45(2), pages 227-36.
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  10. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December. [Downloadable!] (restricted)
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  11. Bahmani-Oskooee, Mohsen & Rhee, Hyun-Jae, 1996. "Time-Series Support for Balassa's Productivity-Bias Hypothesis: Evidence from Korea," Review of International Economics, Blackwell Publishing, vol. 4(3), pages 364-70, October.
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  13. DeLoach, Stephen B, 2001. "More Evidence in Favor of the Balassa-Samuelson Hypothesis," Review of International Economics, Blackwell Publishing, vol. 9(2), pages 336-42, May. [Downloadable!] (restricted)
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  16. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," NBER Working Papers 4119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Heather D. Gibson & Jim Malley, 2007. "The Contribution of Sectoral Productivity Differentials to Inflation in Greee," Working Papers 63, Bank of Greece. [Downloadable!]
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  2. Rod Tyers & Iain Bain, 2007. "Appreciating the Renminbi," Departmental Working Papers 2007-09, Australian National University, Economics RSPAS. [Downloadable!]
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  3. Rod Tyers & Jane Golley & Iain Bain, 2007. "China'S Real Exchange Rate Puzzle," CAMA Working Papers 2007-14, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  4. Tuomas A. Peltonen & Michael Sager, 2009. "Productivity shocks and real exchange rates - a reappraisal," Working Paper Series 1046, European Central Bank. [Downloadable!]
  5. Rod Tyers & Jane Golley, 2007. "China’s Real Exchange Rate," ANUCBE School of Economics Working Papers 2007-479, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
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