Productivity, tradability, and the longrun price puzzle paul bergin university of california, davis, and nber reuven glick federal reserve bank of san francisco. The paper surveys empirical evidence on the harrod balassasamuelson effect. The key assumption of the harrodbalassasamuelson effect is that labor. A b s t r a c t the penn balassa samuelson effect is the stylized fact about the positive correlation between crosscountry price level and percapita income. Implications for growth and the ppp the derivation of the balassa samuelson effect allows for different empirical specifications that may. Balassa samuelson effect relative prices between countries depends on relative productivities between tradables and non tradables. This contribution embeds the balassa samuelson hypothesis in a general equilibrium model that combines monopolistic competition and markup variations to examine the determinants of relative prices of nontradables. The balassasamuelson effect in china and its implications.
The balassa samuelson effect depends on intercountry differences in the relative productivity of the tradable and nontradable sectors. The model predicts that if real exchange rate differentials. Disclaimer the views expressed in this paper are those of the authors and do not necessarily represent those of the swiss national bank. Pdf the pennbalassasamuelson effect vy ly academia. However, when dividing the period into two subperiods, it can be found that balassa samuelson effect became more significant in the later part of the transition period. Samuelson, 1964, which is the most prominent theoretical explanation for the penn effect. Productivity, tradability, and the longrun price puzzle. Balassa samuelson effects since supply shocks are the main influence on real exchange rates over the longer run. The model emphasizes the role of markup variations as an important aspect driving relative price movements. Balassa samuelson effect in response to aggregate productivity differentials and deregulation. Samuelson hbs effect, which links the inflation differential and real exchange rate movements to productivity growth differentials, gained a prominent role among these factors.
The balassasamuelson effect is why i always get a haircut when visiting a developing country. The series for germany was retropolated with the previous west. Eurozone competitiveness in a dynamic balassa samuelson penn framework kevin stahler, peterson institute for international economics arvind subramanian, ministry of finance, government of india. New evidence from oecd countries matthias gubler and christoph sax. The paper finds clear evidence of the balassa samuelson effect in both its international and domestic versions in all six countries. The balassasamuelson hypothesis suggests there should be a relationship between the real exchange rate and a countrys relative productivity performance. The balassa samuelson effect in china and its implications for chinas equilibrium real exchange rate yu chen abstract with a rapid accumulation of current account surpluses and foreign exchange reserves in china in the past decades, chinas exchange rate policy has caused many international controversies. Pdf the balassasamuelson effect in central and eastern europe. Pdf this paper aims to provide estimates of the the balassasamuelson effect in romania the extent to which differences in productivity growth. A survey of empirical evidence pdf, efzg working paper series 0607.
The competitiveness in the light of the balassasamuelson. Use the free adobe acrobat reader to view this pdf file. F31,f41 abstract frictionless, perfectly competitive tradedgoods markets justify thinking of purchasing power parity. The uk is the eurozones dumping ground briefings for britain. Effects of technological shocks on relative prices, and on the current account. Theoretically, we refer to the balassa samuelson effect according to which the real exchange rate appreciation is a result of faster relative productivities.
In total, 58 empirical papers are examined within a specialized analytical framework. As a result, the supply of nontradalbe will increase. Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost. Why south africa is cheap for the rich and expensive for. Demand shocks play a significant but less pronounced role in the majority of the countries examined. Using an array of estimation methods, we show that the balassasamuelson effect is not an important driver of inflation rates. Balassa samuelson effect the supplyside economists and others have argued that raising international competitiveness through policies that promote traded goods sectors productivity at the expense of other sectors will increase a nations gdpand increase its standard of livingwhen compared with treating the sectors equally. Introduction formal models of international macroeconomic dynamics do not usually address or incorporate the determinants and evolution of trade. There is little empirical research on whether balassa samuelson effects can explain the. If you do not see its contents the file may be temporarily unavailable at the journal website or you do not have a pdf plugin installed and enabled in your browser.
Balassa samuelson effect is an important phenomenon of actual history but not an inevitable fact of life. The balassa samuelson effect is stronger among urban countries. Second, we obtain strong evidence of nonlinear adjustment in the shortrun. The survey encompasses the published empirical work on the phenomenon since its rediscovery in 1964. The views expressed in this working paper are those of the authors and do not necessarily represent those of the imf or imf policy. This report documents the results of cointegration analyses of the degree of convergence which the economies of the centraleastern european. This paper provides evidence that the priceincome relation is actually nonlinear and turns. Use the free adobe acrobat reader to view this pdf file there is little empirical research on whether balassasamuelson effects can explain the longrun behavior of real exchange rates in developing countries. An estimation of balassasamuelson effect in albania. Yet, here we are considering only developed countries, and even when. Modelling the balassasamuelson effect in australia pdf. Modelling the balassasamuelson effect in australia, australasian accounting, business and finance journal modelling the balassa samuelson efec t. Estimation of the balassasamuelson effect in slovenia.
Balassasamuelson effect as one of the sources of the real exchange rate movements is analysed in greater detail. This inverse balassa samuelson effect has important distributional consequences. Goods that can be easily shipped sell for roughly the same price everywherethere are differences due to taxes and transportation costs and such things, of course, but there is no reason to expect. The balassasamuelson effect, also known as harrodbalassasamuelson effect, the ricardovinerharrodbalassasamuelsonpennbhagwati effect, or productivity biased purchasing power parity is the tendency for consumer prices to be systematically higher in more developed countries than in less developed countries. Using panel cointegration techniques, we find strong empirical evidence in favour of what we call the internal transmission mechanism since productivity growth in the open sector is. The balassasamuelson effect suggests that an increase in wages in the tradable goods sector of an emerging economy will also lead to higher wages in the nontradable service sector of the economy. This paper studies the balassasamuelson effect in 9 ceecs. From the simple accounting framework that was proposed in other studies, it is obtained that the balassasamuelson effect is indeed evident in slovenia, though its value is not very large over the analysed period.
Pdf the balassasamuelson effect in romania researchgate. An application of the specic factor model hisahiro naito. In the balassa samuelson effect, fx rates do not align with nontraded goods prices, even if they do align with. Samuelson 1964, which is the tendency for the overall price level to rise when wages and prices in the nontraded, lowproductivity sector are pushed up in line with productivity growth in the export sector. Predrag petrovic harrod balassa samuelson effect and the role of distribution. Real exchange rate, balassasamuelson hypothesis, panel data. The results con rm the presence of the harrodbalassasamuelson e ect, providing evidence that the relative productivity between the tradable and nontradable sectors does drive the relative in ation between the nontradable and tradable sectors. Harrod balassa samuelson effect and the role of distribution. On october 17, 1983, the hong kong government introduced the linked exchange rate system backed by a currency board in which the value of the us dollar was fixed at 7. The hbs theory offers a supplyside explanation of higher inflation and the associated real. The balassasamuelson effect arises when productivity growth of the tradable sector exceeds that in the non tradable sector. An overview 5 the economy is assumed to be at full employment. It can quantitatively vary and, in different times and places, trace to.
Balassa samuelson model 5 holding other things constant, as pn increases, the labor demand of the nontradable sector increases and the amount of labor used in the nontradable sector will increase. This paper presents new evidence on this issue based on a panel data sample of 16 developing countries. Investigation of balassasamuelson bs constitutes an important aspect for the monetary policy pursued by central banks, because it lays emphasis on the relation between relative productivity of tradable to non tradable sectors of a small and open economy and relative prices of. The balassasamuelson model in general equilibrium with. Production of tradables and nontradables requires inputs of capital kt, kn and labor lt, ln. The balassa samuelson effect depends on intercountry differences balaxsa the relative productivity of the tradable and nontradable sectors. We refer to balassa 1964 and samuelson 1964 and to some recent working papers in order to formulate an adequate model for moroccan case. Harrodbalassasamuelson effect in selected countries of. Balint balassi memorial sword award, hungarian literary award. What links here related changes upload file special pages permanent link. These findings are consistent with the balassa samuelson model, which uses productivity differences to explain systematic differences in prices and wages between countries, as well as systematic differences between national incomes expressed in a common currency and their ppp values. The balassa samuelson hypothesis suggests there should bea relationship between. Finally, the model successfully matches several moments of u.