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Testing the Balassa-Samuelson Effect: Implications for Growth and the PPP

University of Kent, Economics Working Paper No. 00/08

15 Pages Posted: 11 Dec 2000  

João Ricardo Faria

University of Texas at Dallas - Department of Economics & Finance

Miguel A. Leon-Ledesma

University of Kent, Canterbury - Department of Economics

Date Written: September 2000

Abstract

The derivation of the Balassa-Samuelson effect allows for different empirical specifications that may have important economic implications. Problems related to spurious regression could arise from the mixed order of integration of the series used and from the lack of a long run stable relationship among the variables of the model. This paper addresses these problems by using the bounds testing approach developed by Pesaran, Shin and Smith (1999). Our empirical results do not show supportive evidence for the Balassa-Samuelson effect in the long run. This seems to suggest that PPP holds. However, one of the implications of PPP is that the real exchange rate does not have any real impact on the economy. Further empirical analysis rejects this implication. In fact, the real exchange rate seems to have a long run impact on relative growth rates.

Keywords: Real Exchange Rate, Output, Causality

JEL Classification: F11, F31, C22

Suggested Citation

Faria, João Ricardo and Leon-Ledesma, Miguel A., Testing the Balassa-Samuelson Effect: Implications for Growth and the PPP (September 2000). University of Kent, Economics Working Paper No. 00/08. Available at SSRN: https://ssrn.com/abstract=252427 or http://dx.doi.org/10.2139/ssrn.252427

João Ricardo Faria

University of Texas at Dallas - Department of Economics & Finance ( email )

P.O. Box 830688, GR31
Richardson, TX 75083
United States
972-883-6402 (Phone)
972-883-6297 (Fax)

HOME PAGE: http://www.geocities.com/fariajocka/Index.html

Miguel Leon-Ledesma (Contact Author)

University of Kent, Canterbury - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom
00 44 0 1227 823026 (Phone)
00 44 0 1227 827850 (Fax)

HOME PAGE: http://www.ukc.ac.uk/economics/mal/

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