Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?
AbstractUsing panel data for selected national economies, we estimate relative price changes stemming from fluctuations in sectoral productivity. Subsequently, we calculate the cross-country CPIinflation differentials implied by sectorally unbalanced productivity growth, taking into account country-specific weights of non-tradables 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, should productivity growth in the traded sector not accelerate dramatically.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2002/04.
Date of creation: Dec 2002
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Balassa-Samuelson Effect; cross-country inflation differentials; nominal and real convergence; real exchange rates.;
Other versions of this item:
- Vladislav Flek & Lenka Marková & Jiøí Podpiera, 2003. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(3-4), pages 130-153, March.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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