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Testing the Balassa-Samuelson Effect: Implications for Growth and PPP

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  • João Ricardo Faria
  • Miguel León-Ledesma

    ()

Abstract

The derivation of the Balassa-Samuelson effect allows for different empirical specifications that may have important economic implications. Problems related to spurious regression could arise from the mixed order of integration of the series used and from the lack of a long run stable relationship among the variables of the model. This paper addresses these problems by using the bounds testing approach developed by Pesaran, Shin and Smith (1999). Our empirical results do not show supportive evidence for the Balassa-Samuelson effect in the long run. This seems to suggest that PPP holds. However, one of the implications of PPP is that the real exchange rate does not have any real impact on the economy. Further empirical analysis rejects this implication. In fact, the real exchange rate seems to have a long run impact on relative growth rates.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0008.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0008.

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Date of creation: Sep 2000
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Handle: RePEc:ukc:ukcedp:0008

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: Real exchange rate; Output; Causality;

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References

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  1. M Pesaran & Yongcheol Shin & Richard J Smith, 2004. "Bounds Testing Approaches to the Analysis of Long Run Relationships," ESE Discussion Papers 46, Edinburgh School of Economics, University of Edinburgh.
  2. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  3. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-34, March.
  4. Irving B. Kravis & Robert E. Lipsey, 1988. "National Price Levels and the Prices of Tradables and Nontradables," NBER Working Papers 2536, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
  7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  8. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May.
  9. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
  10. Heston, Alan & Nuxoll, Daniel A & Summers, Robert, 1994. "The Differential-Productivity Hypothesis and Purchasing-Power Parties: Some New Evidence," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 227-43, October.
  11. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
  12. Andres, Javier & Hernando, Ignacio & Kruger, Malte, 1996. "Growth, inflation and the exchange rate regime," Economics Letters, Elsevier, vol. 53(1), pages 61-65, October.
  13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  14. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  15. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
  16. Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 244-67, October.
  17. Balvers, Ronald J. & H. Bergstrand, Jeffrey, 1997. "Equilibrium real exchange rates: closed-form theoretical solutions and some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 345-366, June.
  18. Jack Strauss, 1998. "Relative Price Determination in the Medium Run: The Influence of Wages, Productivity, and International Prices," Southern Economic Journal, Southern Economic Association, vol. 65(2), pages 223-244, October.
  19. Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 201-26, October.
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Cited by:
  1. Ansgar Belke & Thorsten Polleit, 2005. "Monetary Policy and Dividend Growth in Germany: Long-Run Structural Modelling versus Bounds Testing Approach," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 250/2005, Department of Economics, University of Hohenheim, Germany.
  2. Heather D. Gibson & Jim Malley, 2007. "The Contribution of Sectoral Productivity Differentials to Inflation in Greee," Working Papers 63, Bank of Greece.
  3. Arvind Virmani, 2008. "Macro-economic Management of the Indian Economy: Capital Flows, Interest Rates and Inflation," Working Papers id:1353, eSocialSciences.
  4. Ansgar Belke & Thorsten Polleit, 2006. "Dividend Yields for Forecasting Stock Market Returns. An ARDL Cointegration Analysis for Germany," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 9(1), pages 86-116, Summer.
  5. Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 253/2005, Department of Economics, University of Hohenheim, Germany.

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