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The Balassa-Samuelson effect in CEE economies: a CGE analysis

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  • Jakub Boratyński
  • Jakub Borowski
  • Adam Czerniak
  • Dariusz Rosati

Abstract

In this paper we extend previous research on the Balassa-Samuelson (BS) effect for the Central-Eeastern European (CEE) countries, by investigating the impact of inflation in the non-tradables sector on the prices of tradables, using the computable general equilibrium (CGE) framework. The problem of deterioration in price competitiveness, associated with the occurrence of the Balassa-Samuelson effect, is discussed in the context of monetary integration of countries undergoing real convergence process. First, based on CGE simulations we assess vulnerability of individual industries producing traded goods to the BS effect. Specifically, the analysis isolates the influence of non-tradables’ prices through the production costs channel. Second, the attempt is made to evaluate the extent to which the scale of cost pressure depends on labor market conditions. Thirdly, cost pressures in the tradable goods sector industries are compared in the case of accession to the euro zone and in the case of staying out of it. In our simulation experiments, alternative exchange rate regimes are associated with different degrees of wage rigidities. The study uses CGE models of four CEE countries, namely Czech Republic, Hungary, Poland and Romania, which are expected to join the Euro Area in the future. The models are calibrated to the most recent supply and use tables from WIOD. Quantitative assessments of possible impact of the BS effect on individual industries competitiveness, under alternative assumptions concerning labor market structure and exchange rate regimes.

Suggested Citation

  • Jakub Boratyński & Jakub Borowski & Adam Czerniak & Dariusz Rosati, 2017. "The Balassa-Samuelson effect in CEE economies: a CGE analysis," EcoMod2017 10516, EcoMod.
    • Handle: RePEc:ekd:010027:10516
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    References listed on IDEAS

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    2. W. Jill Harrison & J. Mark Horridge & K.R. Pearson, 2000. "Decomposing Simulation Results with Respect to Exogenous Shocks," Computational Economics, Springer;Society for Computational Economics, vol. 15(3), pages 227-249, June.
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    4. Horridge, Mark & Meeraus, Alex & Pearson, Ken & Rutherford, Thomas F., 2013. "Solution Software for Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1331-1381, Elsevier.
    5. Karolina Konopczak, 2013. "The Balassa-Samuelson effect and the channels of its absorption in the Central and Eastern European Countries," NBP Working Papers 163, Narodowy Bank Polski.
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