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Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection


  • Balàzs Ègert



The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long run. Furthermore, the role of regulated prices in the CPI basket is also investigated - we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2-3% over the sample period, and more specifically 1-4% at the beginning of the period and 0.5-1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1-2%. Analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK, shows that, whereas the inflation differential attributable to the B-S effect seems to have been higher in the early 1990s, it better explains the real appreciation occurring in recent years.

Suggested Citation

  • Balàzs Ègert, 2003. "Nominal and real convergence in Estonia: the Balassa-Samuelson (Dis)connection," Bank of Estonia Working Papers 2003-4, Bank of Estonia, revised 10 Oct 2003.
  • Handle: RePEc:eea:boewps:wp2003-04

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    References listed on IDEAS

    1. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March.
    2. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
    3. Dickey, David A & Pantula, Sastry G, 2002. "Determining the Order of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 18-24, January.
    4. Laszlo Halpern & Charles Wyplosz, 2001. "Economic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection," ECE Discussion Papers Series 2001_1, UNECE.
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    Cited by:

    1. Egert, Balazs & Drine, Imed & Lommatzsch, Kirsten & Rault, Christophe, 2003. "The Balassa-Samuelson effect in Central and Eastern Europe: myth or reality?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 552-572, September.
    2. Égert, Balázs & Lommatzsch, Kirsten, 2004. "Equilibrium exchange rates in the transition : the tradable price-based real appreciation and estimation uncertainty," BOFIT Discussion Papers 9/2004, Bank of Finland, Institute for Economies in Transition.
    3. Andreas Freytag, 2004. "EMU Enlargement: Which Concept of Convergence to Apply?," Jenaer Schriften zur Wirtschaftswissenschaft (Expired!) 11/2004, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät.
    4. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries : can we have DEER with BEER without FEER? : A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland, Institute for Economies in Transition.

    More about this item


    convergence; transition; Balassa-Samuelson effect; productivity; relative prices; tradable goods; regulated prices; real exchange rate;

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