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Estimating the Impact of the Balassa-Samuelson Effect in Transition Economies

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  • Lojschová, Adriana

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna)

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    Abstract

    The Balassa-Samuelson (BS) effect is usually considered as the prime explanation of the continuous real exchange rate appreciation of the central and east European (CEE) transition countries against their western European counterparts. This paper tries to explain relative price differentials observed over the past decade between four CEE economies - Slovakia, the Czech Republic, Hungary and Poland - and Euro area in terms of productivity growth differentials. Using panel estimation techniques, we find strong empirical evidence in favour of the BS hypothesis. Furthermore, relaxing some of the assumptions (i.e. PPP holds for tradable goods) results in little support of BS hypothesis. Our estimates of the BS term suggest that the Balassa-Samuelson effect in these 4 CEE countries does not have to be as sizeable as other studies propose.

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    File URL: http://www.ihs.ac.at/publications/eco/es-140.pdf
    File Function: First version, 2003
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    Bibliographic Info

    Paper provided by Institute for Advanced Studies in its series Economics Series with number 140.

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    Length: 35 pages
    Date of creation: Oct 2003
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    Handle: RePEc:ihs:ihsesp:140

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    Related research

    Keywords: Balassa-Samuelson effect; Purchasing Power Parity (PPP); Real exchange rate appreciation; Transition economies;

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    References

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    1. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
    2. 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.
    3. Enrique Alberola-Ila & Tymo Tyrväinen, 1998. "Is there Scope for Inflation Differentials in EMU? An Empirical Evaluation of the Balassa-Samuelson Model in EMU Countries," Banco de Espa�a Working Papers 9823, Banco de Espa�a.
    4. Boštjan Jazbec, 2002. "Real Exchange Rates in Transition Economies," William Davidson Institute Working Papers Series 482, William Davidson Institute at the University of Michigan.
    5. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
    6. Ronald MacDonald & Luca Antonio Ricci, 2001. "PPP and the Balassa Samuelson Effect," IMF Working Papers 01/38, International Monetary Fund.
    7. Desai, Padma, 1998. "Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 621-641, December.
    8. Ricardo Faria, Joao & Leon-Ledesma, Miguel, 2003. "Testing the Balassa-Samuelson effect: Implications for growth and the PPP," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 241-253, June.
    9. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March.
    10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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    Cited by:
    1. Josip Funda & Gorana Lukiniæ & Igor Ljubaj, 2007. "Assessment of the Balassa-Samuelson Effect in Croatia," Financial Theory and Practice, Institute of Public Finance, vol. 31(4), pages 321-351.
    2. Onaran, Ozlem & Stockhammer, Engelbert, 2008. "The effect of FDI and foreign trade on wages in the Central and Eastern European Countries in the post-transition era: A sectoral analysis for the manufacturing industry," Structural Change and Economic Dynamics, Elsevier, vol. 19(1), pages 66-80, March.
    3. Lein-Rupprecht, Sarah M. & León-Ledesma, Miguel A. & Nerlich, Carolin, 2007. "How is real convergence driving nominal convergence in the new EU Member States?," Working Paper Series 0827, European Central Bank.
    4. Balázs Égert, 2005. "Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?," William Davidson Institute Working Papers Series wp796, William Davidson Institute at the University of Michigan.
    5. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
    6. Mirjana Miletić, 2012. "Estimating the Impact of the Balassa-Samuelson Effect in Central and Eastern European Countries: A Revised Analysis of Panel Data Cointegration Tests," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(4), pages 475-499, September.

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