Productivity, Tradability and the Long-Run Price Puzzle

Bergin, Paul R.; Glick, Reuven; Taylor, Alan M.

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Productivity, Tradability and the Long-Run Price Puzzle

58 Pages Posted: 7 Sep 2004

See all articles by Paul R. Bergin

Paul R. Bergin

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

Alan M. Taylor

Columbia University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 3 versions of this paper

Date Written: July 2004

Abstract

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.

Keywords: Real exchange rate, great divergence, Ricardo-Harrod-Balassa-Samuelson effect

JEL Classification: F40, F43, N10, N70

Suggested Citation: Suggested Citation

Bergin, Paul R. and Glick, Reuven and Taylor, Alan M., Productivity, Tradability and the Long-Run Price Puzzle (July 2004). Available at SSRN: https://ssrn.com/abstract=587843