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Harrod-Balassa-Samuelson Effect in Selected Countries of Central and Eastern Europe

  • Monika Blaszkiewicz
  • Przemek Kowalski
  • Lukasz Rawdanowicz
  • Przemyslaw Wozniak

This study investigates the HBS effect in a panel of nine CEECs during 1993:Q1-2003:Q4 (unbalanced panel). Prior to estimating the model, we analyze several key assumptions of the model (e.g. wage equalisation, PPP and sectoral division) and elaborate on possible consequences of their failure to hold. In the empirical part of the paper, we check the level of integration of the variables in our panel using the Pedroni panel-stationarity tests. We then investigate the internal and external version of the HBS effect with the Pedroni panel-cointegration tests as well as by means of group-mean FMOLS and PMGE estimations to conclude that there is a strong evidence in support of the internal HBS and ambiguous evidence regarding the external HBS. Our estimates of the size of inflation and real appreciation consistent with the HBS effect turned out generally within the range of previous estimates in the literature (0-3 % per annum). However, we warn against drawing automatic policy conclusions based on these figures due to very strong assumptions on which they rest (which may not be met in near future). Finally, following the hypotheses put forward in the literature, we elaborate and attempt to evaluate empirically the potential impact of exchange rate regimes on the magnitude of the HBS effect.

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Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Reports with number 0057.

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Length: 96 Pages
Date of creation: 2004
Date of revision:
Handle: RePEc:sec:cnrepo:0057
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  1. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
  2. Laszlo Halpern & Charles Wyplosz, 2001. "Economic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection," ECE Discussion Papers Series 2001_1, UNECE.
  3. Przemek Kowalski, 2003. "Nominal and Real Convergence in Alternative Exchange Rate Regimes in Transition Countries: Implications for the EMU Accession," CASE Network Studies and Analyses 0270, CASE-Center for Social and Economic Research.
  4. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
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  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Takatoshi Ito & Peter Isard & Steven Symansky, 1997. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Working Papers 5979, National Bureau of Economic Research, Inc.
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  12. Andres, Javier & Hernando, Ignacio & Kruger, Malte, 1996. "Growth, inflation and the exchange rate regime," Economics Letters, Elsevier, vol. 53(1), pages 61-65, October.
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  17. Georgios E. Chortareas & Rebecca L. Driver, 2001. "PPP and the real exchange rate-real interest rate differential puzzle revisited: evidence from non-stationary panel data," Bank of England working papers 138, Bank of England.
  18. Moon, H.R. & Perron, P., 2000. "The Seemingly Unrelated Dynamic Cointegration Regression Model and Testing for Purching Power Parity," Cahiers de recherche 2000-03, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  19. Menzie David Chinn, 1997. "Sectoral Productivity, Government Spending and Real Exchange Rates: Empirical Evidence for OECD Countries," NBER Working Papers 6017, National Bureau of Economic Research, Inc.
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  21. Pablo García, 1999. "Income Inequality and the Real Exchange Rate," Working Papers Central Bank of Chile 54, Central Bank of Chile.
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  23. Przemek Kowalski & Wojciech Paczynski & Lukasz Rawdanowicz, 2003. "Exchange Rate Regimes and the Real Sector: a Sectoral Analysis of CEE Countries," CASE Network Studies and Analyses 0248, CASE-Center for Social and Economic Research.
  24. Lawrence H. Officer, 1982. "The Purchasing-Power-Parity Theory of Gerrard de Malynes," History of Political Economy, Duke University Press, vol. 14(2), pages 256-259, Summer.
  25. Zoltán M. Jakab & Mihály András Kovács, 1999. "Determinants of Real Exchange Rate Fluctuations in Hungary," MNB Working Papers 1999/6, Magyar Nemzeti Bank (Central Bank of Hungary).
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