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The Balassa-Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained

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García Solanes, José
Torrejón Flores, Fernando

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Abstract

This paper studies the Balassa-Samuelson hypothesis in two areas with strong differences in economic development, sixteen OECD countries and sixteen Latin American economies. Applying panel cointegration and bootstrapping techniques that solve for cross-sectional dependence problems in the data, we find that the second stage of the hypothesis, which relates relative sector prices with the real exchange rate, only holds in the Latin American area. The failure of the latter in the OECD countries as a whole is reflected in departures from PPP in the tradable sectors, and is probably due to segmentation between national tradable markets. --

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-14.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7215

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Related research
Keywords: Balassa-Samuelson effect; bootstrapping techniques; cross-sectional dependence; economic development; exchange rate systems;

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

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  2. Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2002. "The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?," William Davidson Institute Working Papers Series 483, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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