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Productivity, tradability, and the long-run price puzzle

  • Bergin, Paul R.
  • Glick, Reuven
  • Taylor, Alan M.

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the ‘Balassa-Samuelson’ effect. But looking back 50 years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.

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

Volume (Year): 53 (2006)
Issue (Month): 8 (November)
Pages: 2041-2066

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Handle: RePEc:eee:moneco:v:53:y:2006:i:8:p:2041-2066
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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