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Analysis of the Relative Price of Nontradable Goods in the G7 Countries

Author

Listed:
  • Masahiro Kawai

    (University of Tokyo)

  • Munehisa Kasuya

    (Bank of Japan)

  • Naohisa Hirakata

    (Bank of Japan)

Abstract

To analyze the relative price of nontradable to tradable goods, we build a two-country, two-sector dynamic open macro model that in based on consumers' intertemporal optimizing behavior. The model predicts that the relative price of nontradable goods depends on the cross-sectoral productivity differential, the cumulative current account imbalance, and fiscal expenditure on nontradable goods. Our empirical results using the G7 countries' annual data over the period 1970-1999 support our theoretical predictions. Especially, in Japan, the recent higher relative prices of nontradable goods are explained by sectoral productivity differentials as well as the cumulative current account and the degree of market openness.

Suggested Citation

  • Masahiro Kawai & Munehisa Kasuya & Naohisa Hirakata, 2003. "Analysis of the Relative Price of Nontradable Goods in the G7 Countries," Bank of Japan Working Paper Series 03-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojwps:03-e-5
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    More about this item

    Keywords

    real exchange rate; relative price of nontradable goods; sectoral productivity differential; Balassa-Samuelson hypothesis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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