BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see?
Abstract: 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.
Keywords: Balassa-Samuelson effect; productivity; real exchange rate; transition; panel cointegration; (follow links to similar papers)
JEL-Codes: E31; F31; O11; P17; (follow links to similar papers)
42 pages, July 1, 2002
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