The price of development: The Penn–Balassa–Samuelson effect revisited

Fadi Hassan

Journal of International Economics, 2016, vol. 102, issue C, 291-309

Abstract: The Penn–Balassa–Samuelson effect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price–income relation is actually non-linear and turns negative among low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result. Rather, the different stage of development between countries can explain this new finding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data. This provides additional understanding of real exchange rate determinants in developing countries.

Keywords: Penn effect; Balassa–Samuelson hypothesis; Developing countries; Real exchange rate; Structural transformation (search for similar items in EconPapers)
JEL-codes: F3 F4 O11 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199616300873
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:102:y:2016:i:c:p:291-309

DOI: 10.1016/j.jinteco.2016.07.009

Access Statistics for this article

Journal of International Economics is currently edited by Martin Uribe and Costas Arkolakis

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().