Labor Productivity and Real Exchange Rate: The Balassa-Samuelson Disconnect in the Former Yugoslav Republic of Macedonia
22 Pages Posted: 3 Mar 2006
Date Written: June 2005
This paper seeks to investigate the transmission mechanisms linking productivity to the real exchange rate in the former Yugoslav Republic of Macedonia. At first glance, the stylized factslow labor productivity growth and a trend real depreciationsuggest that a Balassa-Samuelson effect is in play. We find that the relationship between the two is not a result of the traditional Balassa-Samuelson effect. Instead, the depreciation of the real exchange rate reflects mainly the behavior of prices in the tradable sector. We argue that the depreciating real exchange rate may reflect a prolonged transition associated with slow technological growth and the low quality of the country`s tradable-goods basket.
Keywords: Real exchange rate, productivity, Balassa-Samuelson
JEL Classification: F31, F41
Suggested Citation: Suggested Citation