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

Hassan, Fadi

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 (13)

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

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