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Productivity, Tradability and the Long-Run Price Puzzle

  • Bergin, Paul R
  • Glick, Reuven
  • Taylor, Alan M.

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the ‘Balassa-Samuelson’ effect. But looking back 50 years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4494.

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Date of creation: Jul 2004
Handle: RePEc:cpr:ceprdp:4494
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