IDEAS home Printed from https://ideas.repec.org/p/msh/ebswps/2011-5.html
   My bibliography  Save this paper

Real Exchange Rate Movements in Developed and Developing Economies: an Interpretation of the Balassa-Samuelson's Framework

Author

Listed:
  • Taya Dumrongrittikul

Abstract

This paper investigates empirically the Balassa-Samuelson hypothesis (BSH) using annual data over 1970-2008 from 33 countries grouped into developed and developing countries. The innovative feature of our study is that we introduce a new approach for classifying traded and nontraded industries. Our proposed approach allows for country specific heterogeneity over each industry, and changes in classifications of industries across periods. We apply panel cointegration tests with group-mean panel dynamic ordinary least squares (DOLS) estimators suggested in Pedroni (2000, 2001) to examine the BSH. We also use persistence profiles in order to investigate the speed of adjustment to equilibrium in response to shocks on cointegrating relations, and employ them as a complementary tool for checking whether the long run relationships obtained from the tests are actually valid. Our main finding is that there is not enough evidence in favour of the BSH nor in favour of purchasing power parity (PPP) in either developed or developing countries. In developed countries, there is strong evidence that higher growth countries will experience real exchange rate appreciation. However, this relation does not provide evidence in favour of the BSH. We actually find opposing evidence that as productivity growth in traded goods relative to that in nontraded goods increases, the real exchange rated tends to depreciate. For developing countries, our results support the BSH. However, the speed of reversion to equilibrium is very slow. We also find moderate evidence that comparatively rapidly growing developing countries will experience real exchange rate depreciation.

Suggested Citation

  • Taya Dumrongrittikul, 2011. "Real Exchange Rate Movements in Developed and Developing Economies: an Interpretation of the Balassa-Samuelson's Framework," Monash Econometrics and Business Statistics Working Papers 5/11, Monash University, Department of Econometrics and Business Statistics.
  • Handle: RePEc:msh:ebswps:2011-5
    as

    Download full text from publisher

    File URL: http://business.monash.edu/econometrics-and-business-statistics/research/publications/ebs/wp5-11.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
    2. Farid Makhlouf & Mazhar Yasin Mughal, 2013. "Remittances, Dutch Disease, and Competitiveness: a Bayesian Analysis," Post-Print hal-01884858, HAL.
    3. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.

    More about this item

    Keywords

    Balassa-Samuelson effect; real exchange rate; non-stationary panels; traded and nontraded sectors; persistence profile;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:msh:ebswps:2011-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Professor Xibin Zhang (email available below). General contact details of provider: https://edirc.repec.org/data/dxmonau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.