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Does the Balassa-Samuelson Hypothesis Hold for Asian Countries? An Empirical Analysis using Panel Data Cointegration Tests

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  • Imed Drine
  • Christophe Rault

Abstract

This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for 6 Asian countries. We apply new panel data cointegration techniques recently developed by Pedroni (2000) and we compare the results with those obtained with conventional Johansen (1995)???s time series cointegration tests. Whereas, standard time series approach turns out to be able to put in evidence a significant long-run relationship between real exchange rate and productivity differential; this relationship is strongly rejected for all countries using recent advances in the econometrics of non-stationary dynamic panel methods. Closer examinations of the three key components of the BS hypothesis enable us to identify clearly the causes of this empirical failure. We find that the absence of a positive long-run relationship between productivity differential and relative prices is the reason for this rejection.

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  • Imed Drine & Christophe Rault, 2002. "Does the Balassa-Samuelson Hypothesis Hold for Asian Countries? An Empirical Analysis using Panel Data Cointegration Tests," William Davidson Institute Working Papers Series 504, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2002-504
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    Cited by:

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    2. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
    3. Vikas Kakkar & Isabel Yan, 2012. "Real Exchange Rates and Productivity: Evidence from Asia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 301-322, March.

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    More about this item

    Keywords

    Real Exchange Rate; Balassa-Samuelson hypothesis; Asian countries; Panel unit-root and cointegration tests;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F0 - International Economics - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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