Nominal and Real Convergence in Estonia: The Balassa-Samuelson (dis)connection
AbstractThe objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long-run. Furthermore, the role of regulated prices in the CPI basket is also investigated: we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2% to 3% over the sample period, with 1% to 4% at the beginning of the period and 0,5% to 1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1%-2% . The analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK shows that whereas the inflation differential attributable to the B-S effect seems to be higher in the early 1990s, it explains better the real appreciation, which has occurred in recent years.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 556.
Length: 66 pages
Date of creation: 01 Apr 2003
Date of revision:
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convergence; transition; Balassa-Samuelson effect; productivity; relative prices; tradable goods; regulated prices; real exchange rate;
Other versions of this item:
- Balàzs Ègert, 2003. "Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection," Bank of Estonia Working Papers 2003-4, Bank of Estonia, revised 10 Oct 2003.
- NEP-ALL-2003-11-23 (All new papers)
- NEP-IFN-2003-11-23 (International Finance)
- NEP-TRA-2003-11-23 (Transition Economics)
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- Coricelli, Fabrizio & Jazbec, Bostjan, 2004.
"Real exchange rate dynamics in transition economies,"
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