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Harrod, Balassa, and Samuelson (re)visit Eastern Europe

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  • Robert J. Sonora
  • Josip Tica

Abstract

In this paper, we investigate the Harrod-Balassa-Samuelson (HBS) hypothesis in 11 Central and Eastern European transition countries. Unlike previous research, we test the HBS hypothesis with NACE 6 quarterly data which enables us to divide data into tradable and nontradable sectors without requiring unrealistic assumptions on the nature of the data. Contrary to previous results, we are only able to find evidence for univariate HBS effects in Bulgaria, Croatia, Hungary, and Poland. However, using panel cointegration tests, we find strong statistical evidence for the HBS hypothesis within countries and across countries. Our results also demonstrate that cross-country HBS holds under the assumption that the law of one price for tradables does not hold. Finally, we find, contrary to theory, that government consumption negatively impacts relative prices. The policy implications are that failing to acknowledge the peculiarities of the transition process results in suboptimal monetary policy.

Suggested Citation

  • Robert J. Sonora & Josip Tica, 2014. "Harrod, Balassa, and Samuelson (re)visit Eastern Europe," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-17, December.
  • Handle: RePEc:taf:oaefxx:doi:10.1080/23322039.2014.920557
    DOI: 10.1080/23322039.2014.920557
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    7. Mirjana cizmovic & Jelena Jankovic & Milenko Popovic, 2015. "Growth Anatomy of Croatian Economy," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 159-216.
    8. Dragoljub Stojanov, 2015. "The Scope, Challenges and Perspective of Croatian Development Policy in the Context of the EU Destiny," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 75-88.
    9. Mirjana Miletić, 2012. "Estimating the Impact of the Balassa-Samuelson Effect in Central and Eastern European Countries: A Revised Analysis of Panel Data Cointegration Tests," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(4), pages 475-499, September.
    10. Sofija Adžic, 2015. "Zaokret iz recesije ka ekonomskom razvoju sa novim tokom reindustrijalizacije u regionu," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 135-158.
    11. Damir Novotny, 2015. "Fiskalna politika i kriza hrvatskog gospodarstva - u potrazi za rješenjima-," Ekonomija Economics, Rifin d.o.o., vol. 22(1), pages 1-22.
    12. Mirjana Miletic, 2012. "Estimating the Impact of the Balassa-Samuelson Effect in Central and Eastern European Countries: A Revised Analysis of Panel Data Cointegration Tests," Working papers 22, National Bank of Serbia.

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    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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