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Revisiting the Balassa-Samuelson Model with Markup Variations

Author

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  • Romain RESTOUT

    (Université de Lorraine, BETA)

Abstract

This paper addresses the role of markup variations in the transmission process of cross-sectoral productivity differential shocks and government spending shocks to the relative price of non-tradables. The Balassa-Samuelson model based on frictionless goods markets predicts that a rise of 1% in the sectoral productivity ratio raises the relative price by 1% while changes in government spending leave the relative price unaffected. Using panel co-integration and unit root tests applied to a panel of 15 OECD economies, our empirical evidence does not support these implications. We find that a rise of 1% in relative productivity raises the relative price of non-tradables by only 0.7% and that an increase in government spending of 1% of GDP drives up the relative price by around 1%. This evidence can be successfully explained by a two-sector open economy model in which variations in the composition of demand for non-tradables give rise to endogenous changes in the markups.

Suggested Citation

  • Romain RESTOUT, 2013. "Revisiting the Balassa-Samuelson Model with Markup Variations," Discussion Papers (REL - Recherches Economiques de Louvain) 2013032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvre:2013032
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    Keywords

    Balassa-Samuelson model; Markups; Productivity; Government expenditure;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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