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The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?

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Author Info

  • Balázs Égert

    ()
    (National Bank of Austria and MODEM, University of Paris X – Nanterre)

  • Imed Drine

    ()
    (EUREQua, University of Paris I – Sorbonne)

  • Kirsten Lommatzsch

    ()
    (German Institute of Economic Research)

  • Christophe Rault

    ()
    (EPEE, University of Evry Val d’Essonne)

Abstract

This paper studies the Balassa-Samuelson effect in nine Central and East European countries. Using panel cointegration techniques, we find that productivity growth in the open sector leads to inflation in non-tradable goods. Because of the low share of non-tradables and the high share of food items in addition to regulated prices, the consumer price index is misleading when analyzing the Balassa-Samuelson effect. Consequently, the appreciation of the real exchange rate, which has been established as a stylized fact over the last decade, is caused only partly by the Balassa-Samuelson effect. We identify a trend increase in the prices of tradable goods as a contributing explanation.

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File URL: http://epee.univ-evry.fr/RePEc/2005/05-15.pdf
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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 05-15.

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Length: 46 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:eve:wpaper:05-15

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Keywords: Balassa-Samuelson effect; Panel cointegration; Transition economies; EMU;

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  1. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  2. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
  3. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  4. Laszlo Halpern & Charles Wyplosz, 2001. "Economic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection," ECE Discussion Papers Series 2001_1, UNECE.
  5. Chinn, M.D., 1997. "The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates," Papers 97-06, Economisch Institut voor het Midden en Kleinbedrijf-.
  6. Coricelli, Fabrizio & Jazbec, Bostjan, 2001. "Real Exchange Rate Dynamics in Transition Economies," CEPR Discussion Papers 2869, C.E.P.R. Discussion Papers.
  7. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
  8. De Gregorio, Jose & Giovannini, Alberto & Krueger, Thomas H, 1994. "The Behavior of Nontradable-Goods Prices in Europe: Evidence and Interpretation," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 284-305, October.
  9. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of It," IMF Working Papers 97/21, International Monetary Fund.
  10. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  11. Égert, Balázs, 2002. "Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see?," BOFIT Discussion Papers 6/2002, Bank of Finland, Institute for Economies in Transition.
  12. Egert, Balazs, 2002. "Estimating the impact of the Balassa-Samuelson effect on inflation and the real exchange rate during the transition," Economic Systems, Elsevier, vol. 26(1), pages 1-16, April.
  13. Balázs Egert, 2002. "Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
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