The Real Exchange Rate and the BalassaSamuelson Hypothesis: An Appraisal of Israel’s Case Since 1986

Dmitri Romanov
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Dmitri Romanov: Bank of Israel

No 2003.09, Bank of Israel Working Papers from Bank of Israel

Abstract: The Balassa-Samuelson hypothesis, explaining real exchange rate volatility by the differential productivity of the tradable and nontradable sectors, was found to generally fit macro-economic developments since 1986. It turns out that the traditional measures of real exchange rate – the ratio of export/import prices to business-sector product prices – overstated the extent of real appreciation in 1993, 1997-1998, and 2001, being influenced by declining world trade prices, in comparison to the exchange rate of shekel to the US dollar adjusted by GDP deflators. The latter measure has a U-form with a turning point in 1997, suggesting robust real depreciation since then. The elasticity of this real exchange rate with regard to the appreciation of nontradable goods is estimated at 0.7 0.85, while the elasticity with regard to the terms of trade is unitary.

Pages: 35 pages
Date: 2003-08
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