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

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  • Balázs Égert

    ()

  • Imed Drine
  • Kirsten Lommatzsch
  • Christophe Rault

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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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan 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
Date of revision:
Handle: RePEc:wdi:papers:2002-483

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

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  1. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers, Department of Economics, Williams College 2000-03, Department of Economics, Williams College.
  2. Menzie David Chinn, 1997. "The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates," NBER Working Papers 6108, National Bureau of Economic Research, Inc.
  3. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 15(1), pages 83-100, March.
  4. 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.
  5. 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, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  6. 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, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
  7. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
  8. Égert, Balázs, 2002. "Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see?," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 6/2002, Bank of Finland, Institute for Economies in Transition.
  9. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  10. Egert, Balazs, 2002. "Estimating the impact of the Balassa-Samuelson effect on inflation and the real exchange rate during the transition," Economic Systems, Elsevier, Elsevier, vol. 26(1), pages 1-16, April.
  11. Laszlo Halpern & Charles Wyplosz, 2001. "Economic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection," ECE Discussion Papers Series, UNECE 2001_1, UNECE.
  12. 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, Wiley Blackwell, vol. 2(3), pages 284-305, October.
  13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 584.
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