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The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?

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  • Balázs Égert

    () (National Bank of Austria and MODEM, University of Paris X – Nanterre)

  • Imed Drine

    () (EUREQua, University of Paris I – Sorbonne)

  • Kirsten Lommatzsch

    () (German Institute of Economic Research)

  • Christophe Rault

    () (EPEE, University of Evry Val d’Essonne)

Abstract

This paper studies the Balassa-Samuelson effect in nine Central and East European countries. Using panel cointegration techniques, we find that productivity growth in the open sector leads to inflation in non-tradable goods. Because of the low share of non-tradables and the high share of food items in addition to regulated prices, the consumer price index is misleading when analyzing the Balassa-Samuelson effect. Consequently, the appreciation of the real exchange rate, which has been established as a stylized fact over the last decade, is caused only partly by the Balassa-Samuelson effect. We identify a trend increase in the prices of tradable goods as a contributing explanation.

Suggested Citation

  • Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2005. "The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?," Documents de recherche 05-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:05-15
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    References listed on IDEAS

    as
    1. De Gregorio, Jose & Giovannini, Alberto & Krueger, Thomas H, 1994. "The Behavior of Nontradable-Goods Prices in Europe: Evidence and Interpretation," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 284-305, October.
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    More about this item

    Keywords

    Balassa-Samuelson effect; Panel cointegration; Transition economies; EMU;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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