Real currency appreciation in accession countries: Balassa-Samuelson and investment demand

Christoph Fischer

No 8/2002, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

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.

JEL-codes: C33 F31 F41 (search for similar items in EconPapers)
Date: 2002
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Journal Article: Real currency appreciation in accession countries: Balassa-Samuelson and investment demand (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2002_008

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