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The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?

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Author Info
Balázs Égert ()
Imed Drine
Kirsten Lommatzsch
Christophe Rault

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Abstract

This paper studies the Balassa-Samuelson effect in 9 CEECs . Using panel cointegration techniques, we find strong empirical evidence in favour of what we call the internal transmission mechanism since productivity growth in the open sector is found to bring about non-tradable inflation. However, we also shed new light on the fact that the impact of the internal transmission mechanism on overall inflation is considerably attenuated by the low share of non-tradables in the consumer price index. Furthermore, we argue that because of this and the high share of food items and regulated prices, the CPI may be misleading when analysing the Balassa-Samuelson effect. The paper also shows that the appreciation of the transition economies' real exchange rate, which has become something of a stylised fact over the last decade is only partly caused not the Balassa-Samuelson effect. Instead, we argue that a trend increase in tradable prices is behind this phenomenon.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 483.

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Length: 32 pages
Date of creation: 01 Jul 2002
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Handle: RePEc:wdi:papers:2002-483

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

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F31 - International Economics - - International Finance - - - Foreign Exchange
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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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.:
  1. De Gregorio, Jose & Giovannini, Alberto & Krueger, Thomas H, 1994. "The Behavior of Nontradable-Goods Prices in Europe: Evidence and Interpretation," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 284-305, October.
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  2. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of It," IMF Working Papers 97/21, International Monetary Fund.
  3. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I. [Downloadable!] (restricted)
  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. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
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