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Beyond Balassa and Samuelson: Real Convergence, Capital Flows, and Competitiveness in Greece

Author

Listed:
  • Ansgar Belke
  • Ulrich Haskamp
  • Gunther Schnabl
  • Holger Zemanek

Abstract

We scrutinize the role of capital flows in competitiveness in a set of seven euro-area member countries (Estonia, Greece, Latvia, Lithuania, Portugal, Slovenia, and the Slovak Republic) in the context of real convergence and crisis. A specific focus is on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets, placing a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to cause real wages to increase beyond productivity increases. The augmented Balassa-Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 show evidence of the Balassa-Samuelson effect if Greece is excluded from the panel. For Greece, this in turn provides evidence in favour of capital inflow-driven real wage increases in excess of productivity increases.

Suggested Citation

  • Ansgar Belke & Ulrich Haskamp & Gunther Schnabl & Holger Zemanek, 2015. "Beyond Balassa and Samuelson: Real Convergence, Capital Flows, and Competitiveness in Greece," ROME Working Papers 201506, ROME Network.
  • Handle: RePEc:rmn:wpaper:201506
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    References listed on IDEAS

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    Cited by:

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    2. Raphael Fischer & Gunther Schnabl, 2018. "Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU," International Economics and Economic Policy, Springer, vol. 15(2), pages 405-428, April.
    3. Christos Kollias & Petros Messis, 0. "Are future enlargement candidate countries converging with the EU?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 0, pages 1-21.
    4. Christos Kollias & Petros Messis, 2020. "Are future enlargement candidate countries converging with the EU?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(3), pages 453-473, August.
    5. Antoine GODIN & Sakir-Devrim YILMAZ, 2020. "Modelling Small Open Developing Economies in a Financialized World: A Stock-Flow Consistent Prototype Growth Model," Working Paper 5eb7e0e8-560f-4ce6-91a5-5, Agence française de développement.

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    More about this item

    Keywords

    Balassa-Samuelson effect; capital inflows; exchange rate regime; inflation; Greece; Latvia; Portugal; panel model; productivity differential; wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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