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Balassa-Samuelson Effect Approaching Fifty Years: Is it Retiring Early in Australia?

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Abstract

This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for Australia. We applied the ARDL cointegration technique developed by Pesaran et al. (2001) and found evidence of a significant long-run relationship between real exchange rate and Australia-US productivity differential during the period of 1950-2003. We found that a one per cent increase in labour productivity in Australia relative to the US will lead to 5.6 per cent appreciation in the real exchange rate of Australia. We suspect that the elasticity coefficient is “over-estimated” due to the exclusion of relevant explanatory variables. The dynamics and the determinants of the real exchange rate movements are numerous; they include terms of trade, interest rate differentials, net foreign liabilities among others along with labour productivity differential.

Suggested Citation

  • Chowdhury, Khorshed, 2007. "Balassa-Samuelson Effect Approaching Fifty Years: Is it Retiring Early in Australia?," Economics Working Papers wp07-11, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp07-11
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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow033669.pdf
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    References listed on IDEAS

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    Keywords

    Real Exchange Rate; Balassa-Samuelson hypothesis; Unit-root; Structural break and ARDL.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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