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Do panel data permit the rescue of the Balassa-Samuelson hypothesis for Latin American countries?

  • Imed Drine
  • Christophe Rault

This paper tests empirically the Balassa-Samuelson (BS) hypothesis (i.e. rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and non-tradable sectors) using annual data for twenty Latin American countries. The paper applies new panel data unit-root tests proposed by Im et al. (Discussion paper, University of Cambridge, June 1997) and new panel data cointegration techniques suggested by Pedroni (Oxford Bulletin of Economics and Statistics, 1999) and the results are compared with those obtained with conventional time series unit-roots and cointegration tests. The main finding is that whereas a standard time series approach rejects the Balassa-Samuelson hypothesis for 11 countries out of 20, new panel cointegration techniques permit the rescue of this hypothesis for Latin American countries, as well as for Central American and South American groups of countries considered separately.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 3 ()
Pages: 351-359

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Handle: RePEc:taf:applec:v:35:y:2003:i:3:p:351-359
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  1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  2. Cottani, Joaquin A & Cavallo, Domingo F & Khan, M Shahbaz, 1990. "Real Exchange Rate Behavior and Economic Performance in LDCs," Economic Development and Cultural Change, University of Chicago Press, vol. 39(1), pages 61-76, October.
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  5. Danny Quah, 1993. "Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data," FMG Discussion Papers dp171, Financial Markets Group.
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  7. Takatoshi Ito & Peter Isard & Steven Symansky, 1997. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Working Papers 5979, National Bureau of Economic Research, Inc.
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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  11. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  12. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  14. Balassa, Bela, 1973. "Just How Misleading are Official Exchange Rate Conversions?: Comment," Economic Journal, Royal Economic Society, vol. 83(332), pages 1258-67, December.
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