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The Balassa-Samuelson effect in Central and Eastern Europe: myth or reality?

  • Egert, Balazs
  • Drine, Imed
  • Lommatzsch, Kirsten
  • Rault, Christophe

This paper studies the Balassa-Samuelson effect in 9 CEECs . Using panel cointegration techniques, we find strong empirical evidence in favour of what we call the internal transmission mechanism since productivity growth in the open sector is found to bring about non-tradable inflation. However, we also shed new light on the fact that the impact of the internal transmission mechanism on overall inflation is considerably attenuated by the low share of non-tradables in the consumer price index. Furthermore, we argue that because of this and the high share of food items and regulated prices, the CPI may be misleading when analysing the Balassa-Samuelson effect. The paper also shows that the appreciation of the transition economies' real exchange rate, which has become something of a stylised fact over the last decade is only partly caused not the Balassa-Samuelson effect. Instead, we argue that a trend increase in tradable prices is behind this phenomenon.

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Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 31 (2003)
Issue (Month): 3 (September)
Pages: 552-572

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Handle: RePEc:eee:jcecon:v:31:y:2003:i:3:p:552-572
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

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  1. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
  2. Jose De Gregorio & Thomas Krueger & Alberto Giovannini, 1993. "The Behavior of Nontradable Goods Prices in Europe; Evidence and Interpretation," IMF Working Papers 93/45, International Monetary Fund.
  3. Egert, Balazs, 2002. "Estimating the impact of the Balassa-Samuelson effect on inflation and the real exchange rate during the transition," Economic Systems, Elsevier, vol. 26(1), pages 1-16, April.
  4. Menzie David Chinn, 1998. "The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates," Working Papers 31, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Lommatzsch, Kirsten & Tober, Silke, 2002. "Monetary policy aspects of the enlargement of the Euro area," Research Notes 4, Deutsche Bank Research.
  6. Égert, Balázs, 2002. "Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see?," BOFIT Discussion Papers 6/2002, Bank of Finland, Institute for Economies in Transition.
  7. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  8. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  9. Balázs Egert, 2002. "Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
  10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  11. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March.
  12. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
  13. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
  14. Laszlo Halpern & Charles Wyplosz, 2001. "Economic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection," ECE Discussion Papers Series 2001_1, UNECE.
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