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The Balassa-Samuelson effect in central Europe: a disaggregated analysis

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  • Dubravko Mihaljek
  • Marc Klau

Abstract

This paper aims to explain differences in inflation between six central European economies - Croatia, the Czech Republic, Hungary, Poland, Slovakia and Slovenia - and the euro area in terms of differences in productivity growth between tradable and non-tradable sectors. The coverage of tradable and non-tradable sectors is broader and more detailed than in previous studies and the data samples are larger, as quarterly data for up to 10 years are used. The main conclusion is that productivity differentials explain on average only between 0.2 and 2.0 percentage points of annual inflation differentials vis-à-vis the euro area. Productivity differentials also explain only a small proportion of domestic inflation in central European economies. Earlier studies that estimated the Balassa-Samuelson effect to be larger have often neglected to consider the impact of productivity differentials on inflation relative to the euro area, focusing instead only on their impact on domestic inflation. Many studies have also neglected the relatively high productivity growth in non-tradable industries. The estimates in this paper suggest that differences in productivity growth between EU accession countries and the euro area are unlikely to widen sufficiently to become a determining factor in the ability of these countries to satisfy the Maastricht inflation criterion.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 143.

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Length: 27 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:bis:biswps:143

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Related research

Keywords: Balassa-Samuelson effect; central Europe; productivity; inflation; EMU; transition;

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References

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  1. Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2002. "The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?," William Davidson Institute Working Papers Series 483, William Davidson Institute at the University of Michigan.
  2. Coricelli, Fabrizio & Jazbec, Bostjan, 2001. "Real Exchange Rate Dynamics in Transition Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2869, C.E.P.R. Discussion Papers.
  3. Vladislav Flek & Lenka Markova & Jiri Podpiera, 2002. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Working Papers, Czech National Bank, Research Department 2002/04, Czech National Bank, Research Department.
  4. Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Discussion Paper Series 1: Economic Studies 2002,19, Deutsche Bundesbank, Research Centre.
  5. Boštjan Jazbec, 2002. "Real Exchange Rates in Transition Economies," William Davidson Institute Working Papers Series 482, William Davidson Institute at the University of Michigan.
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