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Assessment of the Balassa-Samuelson Effect in Croatia

  • Josip Funda

    (Croatian National Bank, Zagreb)

  • Gorana Lukiniæ

    (Croatian National Bank, Zagreb)

  • Igor Ljubaj

    (Croatian National Bank, Zagreb)

Registered author(s):

    The main objective of this paper is to assess the importance of the Balassa-Samuelson effect in Croatia and to quantify its influence on inflation and the real exchange rate. The productivity growth differential between tradable and nontradable sectors within a given country compared to abroad has recently often been used to explain the real appreciation of Central and East European (CEE) transition countries’ currencies against euro, and also to explain the inflation differential between the aforementioned countries and the euro area. Since all new EU member states are obligated to introduce the euro as the national currency, the Balassa-Samuelson effect associated with real convergence could impede nominal convergence and fulfilment of the necessary Maastricht criteria. The main conclusion of this paper is that in the period from 1998:Q1 to 2006:Q3 the Balassa-Samuelson effect in Croatia was not statistically significant, so it should not constitute a barrier to meeting convergence criteria.

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    File URL: http://www.ijf.hr/eng/FTP/2007/4/funda.pdf
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    Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

    Volume (Year): 31 (2007)
    Issue (Month): 4 ()
    Pages: 321-351

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    Handle: RePEc:ipf:finteo:v:31:y:2007:i:4:p:321-351
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    1. 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.
    2. Lojschová, Adriana, 2003. "Estimating the Impact of the Balassa-Samuelson Effect in Transition Economies," Economics Series 140, Institute for Advanced Studies.
    3. Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," BOFIT Discussion Papers 8/2002, Bank of Finland, Institute for Economies in Transition.
    4. Arratibel, Olga & Rodriguez-Palenzuela, Diego & Thimann, Christian, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 0132, European Central Bank.
    5. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
    6. Josip Tica & Ivo Družić, 2006. "The Harrod-Balassa-Samuelson Effect: A Survey of Empirical Evidence," EFZG Working Papers Series 0607, Faculty of Economics and Business, University of Zagreb.
    7. Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc.
    8. Boštjan Jazbec, 2002. "Balassa-Samuelson Effect in Transition Economies: The Case of Slovenia," William Davidson Institute Working Papers Series 507, William Davidson Institute at the University of Michigan.
    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. 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.
    11. Broeck, Mark De & Sløk, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition.
    12. Taylor Mark P. & Sarno Lucio, 2001. "Real Exchange Rate Dynamics in Transition Economies: A Nonlinear Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-26, October.
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