BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 8/2002:
Real currency appreciation in accession countries: Balassa-Samuelson and investment demand
Christoph Fischer ()
Abstract: The Balassa-Samuelson effect is usually seen as the prime
explanation of the continuous real appreciation of central and east
European (CEE) transition countries' currencies against their western
counterparts. The response of a small country's real exchange rate to
various shocks is derived in a simple model. It is shown that productivity
shocks work not only through a Balassa-type supply channel but also through
an investment demand channel. Therefore, empirical evidence apparently in
favour of Balassa-Samuelson effects may require a re-interpretation. The
model is estimated for a panel of CEE countries. The results are consistent
with the model, plausibly explain the observed real appreciation and
support the existence of the proposed investment demand channel.
Keywords: real exchange rate; Balassa-Samuelson effect; transition economies; panel; (follow links to similar papers)
JEL-Codes: C33; F31; F41; (follow links to similar papers)
36 pages, August 1, 2002
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