PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector

MacDonald, Ronald; Ricci, Luca A.

doi:10.2139/ssrn.268969

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PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector

49 Pages Posted: 14 May 2001

See all articles by Ronald MacDonald

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

There are 3 versions of this paper

Date Written: March 2001

Abstract

This paper investigates the impact of the distribution sector on the real exchange rate, controlling for the Balassa-Samuelson effect, as well as other macro variables. Long-run coefficients are estimated using a panel dynamic OLS estimator. The main result is that an increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similarly to what a relative increase in the domestic productivity of tradables does. This contrasts with the result that one would expect by considering the distribution sector as belonging to the non-tradable sector. One explanation may lie in the use of the services from the distribution sector in the tradable sector. Our results also contribute to explaining the so-called PPP puzzle.

Keywords: Real Exchange Rates, Purchasing Power Parity, Balassa-Samuelson, Distribution Sector, PPP Puzzle

JEL Classification: F131.

Suggested Citation: Suggested Citation

MacDonald, Ronald R. and Ricci, Luca Antonio, PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector (March 2001). Available at SSRN: https://ssrn.com/abstract=268969 or http://dx.doi.org/10.2139/ssrn.268969