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Can we identify Balassa-Samuelson effects with measures of product variety?

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  • Richard Frensch
  • Achim Schmillen

    (Osteuropa-Institut, Regensburg (Institut for East European Studies))

Abstract

The Balassa-Samuelson hypothesis – i.e. that real exchange rates between each pair of countries increase with the tradables sector productivities ratio between these countries, and decrease with their non-tradables sector productivities ratio – has been one of the most prominent frameworks in open economy macroeconomics for more than forty years. However, empirical studies have often been unable to confirm it. We argue that this might at least in part be due to measurement errors leading to downward-biased estimates. We test the Balassa-Samuelson hypothesis with innovative trade-based vari-ety measures to differentiate between tradables and non-tradables sector productivities that do not suffer from such errors-in-variables. Using a pairwise regression approach, we find stable and very robust Balassa-Samuelson effects over all our specifications.

Suggested Citation

  • Richard Frensch & Achim Schmillen, 2010. "Can we identify Balassa-Samuelson effects with measures of product variety?," Working Papers 288, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    • Handle: RePEc:ost:wpaper:288
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    Cited by:

    1. Kutan, Ali M. & Zhou, Su, 2015. "PPP may hold better than you think: Smooth breaks and non-linear mean reversion in real effective exchange rates," Economic Systems, Elsevier, vol. 39(2), pages 358-366.
    2. Achim Schmillen, 2010. "Are Wages Equal Across Sectors of Production? A Panel Data Analysis for Tradable and Non-Tradable Goods," Working Papers 285, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    3. Achim Schmillen, 2013. "Are wages equal across sectors of production?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(4), pages 655-682, October.

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    More about this item

    Keywords

    Balassa-Samuelson; product variety; measurement errors; pairwise regressions;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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