Productivity differentials and external balance in ERM II
AbstractDifferences in growth, productivity and inflation levels are going to be a prominent feature of the future of EMU, as the convergence process is still ongoing in the new Member States. This convergence process can be described by the Balassa-Samuelson proposition, which states that faster growth in the traded goods sector than in the non-traded goods sector results in a rise in the price of non-traded goods and an appreciation of the trend real exchange rate. In this study, the aim is to construct a small open economy model that enables examination of the effects of Balassa-Samuelson-type growth in an intertemporal fixed exchange rate framework with a focus on the external balance. To address the well- known problems with small open economy models, an endogenous discount rate is used. The results imply that faster productivity growth in the traded than in the non-traded goods sector may induce external imbalances, leading to increased vulnerability of the economy. However, trade account deficits would appear to be a temporary phenomenon, as this line of development can be reversed by the natural shift in the composition of consumption towards nontraded goods that is characteristic of catch-up economies. In the meantime, fiscal policy plays a key role.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0508013.
Length: 36 pages
Date of creation: 31 Aug 2005
Date of revision:
Note: Type of Document - pdf; pages: 36
Contact details of provider:
Web page: http://22.214.171.124
small open economy; Balassa-Samuelson effect; ERM II; external balance;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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.:
- Chinn, Menzie D. & Prasad, Eswar S., 2003.
"Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration,"
Journal of International Economics,
Elsevier, vol. 59(1), pages 47-76, January.
- Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
- Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries - An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
- repec:rus:hseeco:123846 is not listed on IDEAS
- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
- Ivanna Vladkova Hollar & Giovanni Dell'Ariccia & Carlo Cottarelli, 2003.
"Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and in the Balkans,"
IMF Working Papers
03/213, International Monetary Fund.
- Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 83-104, January.
- Rudiger Dornbusch, 1983.
"Real Interest Rates, Home Goods, and Optimal External Borrowing,"
NBER Working Papers
0779, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
- Gianluca Benigno & Christoph Thoenissen, 2003.
"Equilibrium Exchange Rates and Supply-Side Performance,"
Royal Economic Society, vol. 113(486), pages C103-C124, March.
- Benigno, Gianluca & Christoph Thoenissen, 2002. "Equilibrium Exchange Rates and Supply Side Performance," Royal Economic Society Annual Conference 2002 19, Royal Economic Society.
- Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.