Beyond Balassa and Samuelson: Real Convergence, Capital Flows, and Competitiveness in Greece

Ansgar Belke, Ulrich Haskamp (), Gunther Schnabl and Holger Zemanek

No 201506, ROME Working Papers from ROME Network

Abstract: We scrutinize the role of capital flows in competitiveness in a set of seven euro-area member countries (Estonia, Greece, Latvia, Lithuania, Portugal, Slovenia, and the Slovak Republic) in the context of real convergence and crisis. A specific focus is on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets, placing a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to cause real wages to increase beyond productivity increases. The augmented Balassa-Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 show evidence of the Balassa-Samuelson effect if Greece is excluded from the panel. For Greece, this in turn provides evidence in favour of capital inflow-driven real wage increases in excess of productivity increases.

Keywords: Balassa-Samuelson effect; capital inflows; exchange rate regime; inflation; Greece; Latvia; Portugal; panel model; productivity differential; wages (search for similar items in EconPapers)
JEL-codes: E24 F16 F31 F32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-06
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Beyond Balassa and Samuelson: real convergence, capital flows, and competitiveness in Greece (2018)
Working Paper: Beyond Balassa and Samuelson: Real Convergence, Capital Flows, and Competitiveness in Greece (2015)
Working Paper: Beyond Balassa and Samuelson: Real convergence, capital flows, and competitiveness in Greece (2015)
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