Productivity, Tradability and the Long-Run Price Puzzle
Paul R. Bergin
University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)
Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies
Alan M. Taylor
University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 4494
Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the 'Balassa-Samuelson' effect. But looking back 50 years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.
Number of Pages in PDF File: 58
Keywords: Real exchange rate, great divergence, Ricardo-Harrod-Balassa-Samuelson effect
JEL Classification: F40, F43, N10, N70working papers series
Date posted: September 7, 2004
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