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Productivity, tradability, and the long-run price puzzle

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

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 fifty 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 Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2004-08.

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Date of creation: 2004
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Handle: RePEc:fip:fedfwp:2004-08
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