Analytical notes on the Balassa-Samuelson effect
The oft invoked Balassa-Samuelson effect, whereby the movements of prices for non-tradable goods relative to those for tradable goods reflect the movements of relative labour productivities, is customarily derived from a standard neo-classical model with highly restrictive features. Minor modifications to the assumptions underlying the model negate the effect. In general, the effect does not necessarily obtain if technical change alters the elasticity parameters of the production functions. Moreover, theeffect does not generally obtain (or cannot even be derived uniquely) in more general models that allow for non-constant returns to scale or intermediate inputs.
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"Anchor, float or abandon ship: exchange rate regimes for the accession countries,"
BNL Quarterly Review,
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