The Balassa-Samuelson Effect in a Developing Country
Some Asian countries experience small real exchange rate appreciations or even a real depreciation despite a fast growth in tradable productivity. A key-characteristic of these countries is that they are constrained on capital inflows. Is the Balassa-Samuelson theory still valid in those countries? Are there other factors likely to explain real exchange rate (RER) changes? To address these questions, we develop a two-sector model in which a small open economy faces a constraint on capital inflows. In this setting, the RER does not only depend on productivity, but also on other factors like the rate of time preference, the age dependency ratio or the level of the external constraint. A calibration of the constrained economy model seems to match at least qualitatively empirical evidence for China, Hong Kong, Indonesia, Malaysia, Thailand, and Singapore, between 1970 and 1992. Copyright © 2006 The Author; Journal compilation © 2006 Blackwell Publishing Ltd.
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Volume (Year): 10 (2006)
Issue (Month): 4 (November)
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References listed on IDEAS
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- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
- Jones, Ronald W. & Easton, Stephen T., 1983. "Factor intensities and factor substitution in general equilibrium," Journal of International Economics, Elsevier, vol. 15(1-2), pages 65-99, August.
- Takatoshi Ito & Peter Isard & Steven Symansky, 1997.
"Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia,"
NBER Working Papers
5979, National Bureau of Economic Research, Inc.
- Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 109-132 National Bureau of Economic Research, Inc.
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