Balassa-Samuelson Effect in Emerging Market Economies- An Empirical Examination

Radheshyam Verma, Siddhartha Nath, Chaitali Bhowmick and Swastik Yadav

MPRA Paper from University Library of Munich, Germany

Abstract: This study revisits the Balassa-Samuelson (B-S) hypothesis for 16 inflation-targeting emerging market and developing economies (EMDEs) to test whether their inflation differential with the advanced economies (AEs) could be explained through the productivity channel. The study finds positive and significant impact of total factor productivity (TFP) and labour productivity (LP) growth differentials on inflation differentials between AEs and inflation targeting EMDEs. The B-S effect is estimated in the range 1.6-2.5 percentage points for India. The average B-S effect for the inflation targeting EMDEs, however, is found at a lower level at 0.5-0.8 percentage points. This difference in the B-S effect between India and EMDEs arises from India’s higher TFP growth (vis-à-vis AEs) compared to the EMDEs. The sectoral level analysis also corroborates these findings. Our findings provide an empirical support to the role of productivity growth differential in explaining the inflation differential between AEs and major EMDEs in the medium term.

Keywords: TFP; Inflation targeting; Balassa-Samuelson; productivity differential; traded-non-traded sector (search for similar items in EconPapers)
JEL-codes: C23 D24 E31 E58 F14 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-eff and nep-mon
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