The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?

Balázs Égert, Imed Drine (), Kirsten Lommatzsch () and Christophe Rault ()

No 483, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

Abstract: This paper studies the Balassa-Samuelson effect in 9 CEECs . Using panel cointegration techniques, we find strong empirical evidence in favour of what we call the internal transmission mechanism since productivity growth in the open sector is found to bring about non-tradable inflation. However, we also shed new light on the fact that the impact of the internal transmission mechanism on overall inflation is considerably attenuated by the low share of non-tradables in the consumer price index. Furthermore, we argue that because of this and the high share of food items and regulated prices, the CPI may be misleading when analysing the Balassa-Samuelson effect. The paper also shows that the appreciation of the transition economies' real exchange rate, which has become something of a stylised fact over the last decade is only partly caused not the Balassa-Samuelson effect. Instead, we argue that a trend increase in tradable prices is behind this phenomenon.

Keywords: Balassa-Samuelson effect; Panel cointegration; Transition economies; EMU (search for similar items in EconPapers)
JEL-codes: E31 F31 C15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2002-07-01
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Journal Article: The Balassa-Samuelson effect in Central and Eastern Europe: myth or reality? (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2002-483

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