The Relative Price of Non-traded Goods in an Imperfectly Competitive Economy: Empirical Evidence for G7 Countries

Coto-Martinez, Javier () and Juan Reboredo
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Coto-Martinez, Javier: Department of Economics, City University, London, http://www.city.ac.uk/economics/
Juan Reboredo: Universidade de Santiago de Compostela

No 07/14, City University Economics Discussion Papers from Department of Economics, City University, London

Abstract: In this paper, we consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa-Samuelson framework. Under imperfect competition in the two sectors, relative prices depend on both productivity differentials and mark-up differentials. We test this implication using a panel of sectors for the seven major OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials. Unlike the original Balassa-Samuelson model, aggregate demand could affect the real exchange rate by changing the mark ups. The empirical results show that aggregate demand fluctuations lead to changes on the mark-ups.

Keywords: Balassa-Samuelson hypothesis; real exchange rate; relative prices; imperfect competition. (search for similar items in EconPapers)
JEL-codes: F31 F36 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2007-11
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Persistent link: http://EconPapers.repec.org/RePEc:cty:dpaper:0714

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