Investigating the Balassa-Samuelson Hypothesis in Transition: Do We Understand What We See?
Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute
July 3, 2002
BOFIT Discussion Paper No. 6/2002
This paper studies the Balassa-Samuelson effect in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. Time series and panel cointegration techniques are used to show that the BS effect works reasonably well in these transition economies during the period 1991:Q1 to 2001:Q2. However, productivity growth does not fully translate into price in-creases due to the structure of CPI indexes. We thus argue that productivity growth will not hinder the ability of the five EU accession candidates to meet the Maastricht criterion on inflation in the medium term. Moreover, the observed appreciation of the CPI-deflated real exchange rate is found to be systematically higher compared to the real appreciation justi-fied by the Balassa-Samuelson effect, particularly in the cases of the Czech Republic and Slovakia. This may be partly explained by the trend appreciation of the tradable-goods-price-based real exchange rate, increases in non-tradable sector prices due to price liberali-sation and demand-side pressures, and the evolution of the nominal exchange rate due to the exchange rate regime and magnitude of capital inflows.
Number of Pages in PDF File: 42
Keywords: Balassa-Samuelson effect, productivity, real exchange rate, transition, panel cointegration
JEL Classification: E31, F31, O11, P17
Date posted: September 20, 2007