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Price Convergence: What Can the Balassa-Samuelson Model Tell Us?

  • Tomas Holub
  • Martin Cihak

The paper provides a theoretical reference point for discussions on adjustments in price levels and relative prices. The authors present a 'nested' model integrating the Balassa-Samuelson model of the real equilibrium exchange rate with a model of accumulation of capital and with the demand side of the economy. Consequently, they show how the model can be generalised to a case of numerous commodities with different degrees of tradability. The predictions of the model are generally consistent with empirical findings for Central and Eastern European countries. The authors show how the theoretical model can be used for internally consistent simulations of the future convergence process in a transition economy.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/08.

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Date of creation: Dec 2003
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Handle: RePEc:cnb:wpaper:2003/08
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