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Productivity, Tradability, and the Long-Run Price Puzzle

  • Paul 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10569.

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Date of creation: Jun 2004
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Publication status: published as Bergin, Paul R. & Glick, Reuven & Taylor, Alan M., 2006. "Productivity, tradability, and the long-run price puzzle," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2041-2066, November.
Handle: RePEc:nbr:nberwo:10569
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