Analysis of the Relative Price of Nontradable Goods in the G7 Countries

Masahiro Kawai (), Munehisa Kasuya and Naohisa Hirakata
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Munehisa Kasuya: Bank of Japan

No 03-E-5, Bank of Japan Working Paper Series from Bank of Japan

Abstract: To analyze the relative price of nontradable to tradable goods, we build a two-country, two-sector dynamic open macro model that in based on consumers' intertemporal optimizing behavior. The model predicts that the relative price of nontradable goods depends on the cross-sectoral productivity differential, the cumulative current account imbalance, and fiscal expenditure on nontradable goods. Our empirical results using the G7 countries' annual data over the period 1970-1999 support our theoretical predictions. Especially, in Japan, the recent higher relative prices of nontradable goods are explained by sectoral productivity differentials as well as the cumulative current account and the degree of market openness.

Keywords: real exchange rate; relative price of nontradable goods; sectoral productivity differential; Balassa-Samuelson hypothesis (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
Date: 2003-10
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