Revisiting the Balassa-Samuelson Model with Markup Variations

Romain Restout ()

No 2013032, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This paper addresses the role of markup variations in the transmission process of cross-sectoral productivity differential shocks and government spending shocks to the relative price of non-tradables. The Balassa-Samuelson model based on frictionless goods markets predicts that a rise of 1% in the sectoral productivity ratio raises the relative price by 1% while changes in government spending leave the relative price unaffected. Using panel co-integration and unit root tests applied to a panel of 15 OECD economies, our empirical evidence does not support these implications. We find that a rise of 1% in relative productivity raises the relative price of non-tradables by only 0.7% and that an increase in government spending of 1% of GDP drives up the relative price by around 1%. This evidence can be successfully explained by a two-sector open economy model in which variations in the composition of demand for non-tradables give rise to endogenous changes in the markups.

Keywords: Balassa-Samuelson model; Markups; Productivity; Government expenditure (search for similar items in EconPapers)
JEL-codes: E20 E62 F31 F41 (search for similar items in EconPapers)
Pages: 44
Date: 2013-09-01
New Economics Papers: this item is included in nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvre:2013032

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