Balassa-Samuelson Effect Approaching Fifty Years: Is it Retiring Early in Australia?

Khorshed Chowdhury ()
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Khorshed Chowdhury: University of Wollongong, http://www.uow.edu.au/commerce/econ/who/index.html

Economics Working Papers from School of Economics, University of Wollongong, NSW, Australia

Abstract: This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for Australia. We applied the ARDL cointegration technique developed by Pesaran et al. (2001) and found evidence of a significant long-run relationship between real exchange rate and Australia-US productivity differential during the period of 1950-2003. We found that a one per cent increase in labour productivity in Australia relative to the US will lead to 5.6 per cent appreciation in the real exchange rate of Australia. We suspect that the elasticity coefficient is “over-estimated” due to the exclusion of relevant explanatory variables. The dynamics and the determinants of the real exchange rate movements are numerous; they include terms of trade, interest rate differentials, net foreign liabilities among others along with labour productivity differential.

Keywords: Real Exchange Rate; Balassa-Samuelson hypothesis; Unit-root; Structural break and ARDL. (search for similar items in EconPapers)
JEL-codes: C22 F11 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written
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