Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection
AbstractThe objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long run. Furthermore, the role of regulated prices in the CPI basket is also investigated - we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2-3% over the sample period, and more specifically 1-4% at the beginning of the period and 0.5-1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1-2%. Analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK, shows that, whereas the inflation differential attributable to the B-S effect seems to have been higher in the early 1990s, it better explains the real appreciation occurring in recent years.
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Bibliographic InfoPaper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2003-4.
Length: 66 pages
Date of creation: 10 Oct 2003
Date of revision: 10 Oct 2003
Publication status: published
Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
Other versions of this item:
- Balázs Égert, 2003. "Nominal and Real Convergence in Estonia: The Balassa-Samuelson (dis)connection," William Davidson Institute Working Papers Series 556, William Davidson Institute at the University of Michigan.
- NEP-ALL-2005-07-25 (All new papers)
- NEP-FMK-2005-07-25 (Financial Markets)
- NEP-IFN-2005-07-25 (International Finance)
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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"Real exchange rate dynamics in transition economies,"
Structural Change and Economic Dynamics,
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- Andreas Freytag, 2004. "EMU Enlargement: Which Concept of Convergence to Apply?," Jenaer Schriften zur Wirtschaftswissenschaft 11/2004, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät.
- Wachtel, Paul & Korhonen, Iikka, 2004. "Observations on disinflation in transition economies," BOFIT Discussion Papers 5/2004, Bank of Finland, Institute for Economies in Transition.
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