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Can we identify Balassa-Samuelson effects with measures of product variety?

  • Richard Frensch

    ()

  • Achim Schmillen

    ()

    (Osteuropa-Institut, Regensburg (Institut for East European Studies))

The Balassa-Samuelson hypothesis – i.e. that real exchange rates between each pair of countries increase with the tradables sector productivities ratio between these countries, and decrease with their non-tradables sector productivities ratio – has been one of the most prominent frameworks in open economy macroeconomics for more than forty years. However, empirical studies have often been unable to confirm it. We argue that this might at least in part be due to measurement errors leading to downward-biased estimates. We test the Balassa-Samuelson hypothesis with innovative trade-based vari-ety measures to differentiate between tradables and non-tradables sector productivities that do not suffer from such errors-in-variables. Using a pairwise regression approach, we find stable and very robust Balassa-Samuelson effects over all our specifications.

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Paper provided by Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) in its series Working Papers with number 288.

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Length: 24
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:ost:wpaper:288
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  1. Frensch, Richard & Gaucaite Wittich, Vitalija, 2009. "Product variety and technical change," Journal of Development Economics, Elsevier, vol. 88(2), pages 242-257, March.
  2. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
  3. Achim Schmillen, 2010. "Are Wages Equal Across Sectors of Production? A Panel Data Analysis for Tradable and Non-Tradable Goods," Working Papers 285, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
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  9. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
  10. Bergin, Paul R & Glick, Reuven & Taylor, Alan M., 2004. "Productivity, Tradability and the Long-Run Price Puzzle," CEPR Discussion Papers 4494, C.E.P.R. Discussion Papers.
  11. Luca Antonio Ricci & Jaewoo Lee & Gian-Maria Milesi-Ferretti, 2008. "Real Exchange Rates and Fundamentals; A Cross-Country Perspective," IMF Working Papers 08/13, International Monetary Fund.
  12. Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 201-26, October.
  13. Jaewoo Lee & Man-Keung Tang, 2007. "Does Productivity Growth Appreciate the Real Exchange Rate?," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 164-187, 02.
  14. Addison, Douglas M., 2003. "Productivity growth and product variety : gains from imitation and education," Policy Research Working Paper Series 3023, The World Bank.
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  17. Josip Tica & Ivo Družić, 2006. "The Harrod-Balassa-Samuelson Effect: A Survey of Empirical Evidence," EFZG Working Papers Series 0607, Faculty of Economics and Business, University of Zagreb.
  18. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
  19. Robert Feenstra & Madani & Dorsati & Yang & Tzu-Han, and Liang, Chi-Yuan, 2003. "Testing Endogenous Growth In South Korea And Taiwan," Working Papers 9716, University of California, Davis, Department of Economics.
  20. Richard Frensch & Achim Schmillen, 2011. "The Penn Effect and Transition : The New EU Member States in International Perspective," Working Papers 295, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  21. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," NBER Working Papers 4119, National Bureau of Economic Research, Inc.
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  26. Jarko Fidrmuc, 2009. "Gravity models in integrated panels," Empirical Economics, Springer, vol. 37(2), pages 435-446, October.
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