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The price of development: The Penn–Balassa–Samuelson effect revisited

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  • Hassan, Fadi

Abstract

The Penn–Balassa–Samuelson effect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price–income relation is actually non-linear and turns negative among low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result. Rather, the different stage of development between countries can explain this new finding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data. This provides additional understanding of real exchange rate determinants in developing countries.

Suggested Citation

  • Hassan, Fadi, 2016. "The price of development: The Penn–Balassa–Samuelson effect revisited," Journal of International Economics, Elsevier, vol. 102(C), pages 291-309.
  • Handle: RePEc:eee:inecon:v:102:y:2016:i:c:p:291-309
    DOI: 10.1016/j.jinteco.2016.07.009
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    Cited by:

    1. Fidora, Michael & Giordano, Claire & Schmitz, Martin, 2017. "Real exchange rate misalignments in the euro area," Working Paper Series 2108, European Central Bank.
    2. repec:eee:jimfin:v:75:y:2017:i:c:p:69-92 is not listed on IDEAS
    3. repec:eee:jimfin:v:77:y:2017:i:c:p:18-38 is not listed on IDEAS
    4. repec:eee:ecosys:v:41:y:2017:i:2:p:297-304 is not listed on IDEAS
    5. Bordo, Michael D. & Choudhri, Ehsan U. & Fazio, Giorgio & MacDonald, Ronald, 2017. "The real exchange rate in the long run: Balassa-Samuelson effects reconsidered," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 69-92.

    More about this item

    Keywords

    Penn effect; Balassa–Samuelson hypothesis; Developing countries; Real exchange rate; Structural transformation;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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