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The Balassa-Samuelson Effect in 'East & West'. Differences and Similarities

Author

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  • Wagner, Martin

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

Abstract

Based on two detailed Balassa-Samuelson (BS) studies, Wagner and Hlouskova (2004) for eight Central Eastern European countries (CEECs) and Wagner and Doytchinov (2004) for ten Western European countries (WECs), this study assesses the differences and similarities of the BS effect between these two country groups. The econometric results show that the BS effect may have been overestimated in previous studies due to application of inappropriate first generation panel cointegration methods. When appropriately quantified, the BS effect itself explains RER movements respectively inflation differentials only to a small extent. However, extended BS relationships that include additional variables allow for an adequate modelling of inflation. Based on the comparative analysis we draw some conclusions for monetary policy in the future enlarged Euro Area.

Suggested Citation

  • Wagner, Martin, 2005. "The Balassa-Samuelson Effect in 'East & West'. Differences and Similarities," Economics Series 180, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:180
    as

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    File URL: https://irihs.ihs.ac.at/id/eprint/1670
    File Function: First version, 2005
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    References listed on IDEAS

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    Cited by:

    1. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & JiÅí SlaÄálek & Przemyslaw Wozniak, 2008. "Price Convergence in an Enlarged Internal Market," Eastern European Economics, Taylor & Francis Journals, vol. 46(5), pages 57-68, September.
    2. García Solanes José, 2008. "Real Exchange Rate Appreciation in Central and Eastern European Countries. Why the Balassa-Samuelson Effect Does Not Explain the Whole Story," Working Papers 2010100, Fundacion BBVA / BBVA Foundation.

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    More about this item

    Keywords

    Balassa-Samuelson effect; Central and Eastern Europe; Western Europe; Non-stationary panels; Inflation simulations;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • P21 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform
    • P27 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Performance and Prospects

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