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The Balassa‐Samuelson Hypothesis in Estonia: Oil Shale, Tradable Goods, Regulated Prices and Other Culprits

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  • Balázs Égert

Abstract

This paper analyses the Balassa‐Samuelson (B‐S) framework for the case of Estonia using a unique dataset that consists of a 15‐sectoral breakdown of GDP and a five‐digit level CPI disaggregation with 260 items over the period from 1993 to 2002. Unlike the existing literature, the paper focuses on the following four aspects of the phenomenon: (a) data disaggregation, (b) definition of goods tradability, (c) price regulatedness in services and (d) possible heterogeneity across transition countries. It turns out that the first three aspects do matter and, in addition to this, Estonia appears to bear very specific characteristics when compared with other transition countries. A battery of cointegration techniques (DOLS, ARDL, Johansen) shows that productivity is strongly related to relative prices only when regulated prices are controlled for appropriately in the consumer price index and when country‐specific classification is applied to the open and closed sectors. The B‐S effect contributed to CPI by 1 to 1.5 per cent at the outset of the period and by 0.4 to 0.6 per cent in 2002, whereas its potential long‐run impact is estimated to be 1 to 1.2 per cent. Although real appreciation due to the B‐S effect seems higher in the early 1990s, it explains that better real appreciation occurred in recent years.

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  • Balázs Égert, 2005. "The Balassa‐Samuelson Hypothesis in Estonia: Oil Shale, Tradable Goods, Regulated Prices and Other Culprits," The World Economy, Wiley Blackwell, vol. 28(2), pages 259-286, February.
    • Handle: RePEc:bla:worlde:v:28:y:2005:i:2:p:259-286
    DOI: 10.1111/j.1467-9701.2005.00640.x
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    2. Václav Žďárek & Jaromír Šindel, 2007. "Real and Nominal Convergence and the New EU Member States - Actual State and Implications," Prague Economic Papers, Prague University of Economics and Business, vol. 2007(3), pages 195-219.
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    4. Reza Siregar, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp81.
    5. Christian Just, 2004. "The International Financial Architecture: Official Proposals on Crisis Resolution," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 73-89.
    6. Egert, Balazs & Lommatzsch, Kirsten & Lahreche-Revil, Amina, 2006. "Real exchange rates in small open OECD and transition economies: Comparing apples with oranges?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3393-3406, December.
    7. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
    8. Balázs Égert, 2004. "Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 138-181.
    9. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.

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