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The Balassa-Samuelson effect in CEE economies: a CGE analysis

Jakub Boratyński, Jakub Borowski, Adam Czerniak () and Dariusz Rosati

No 10516, EcoMod2017 from EcoMod

Abstract: In this paper we extend previous research on the Balassa-Samuelson (BS) effect for the Central-Eeastern European (CEE) countries, by investigating the impact of inflation in the non-tradables sector on the prices of tradables, using the computable general equilibrium (CGE) framework. The problem of deterioration in price competitiveness, associated with the occurrence of the Balassa-Samuelson effect, is discussed in the context of monetary integration of countries undergoing real convergence process. First, based on CGE simulations we assess vulnerability of individual industries producing traded goods to the BS effect. Specifically, the analysis isolates the influence of non-tradables’ prices through the production costs channel. Second, the attempt is made to evaluate the extent to which the scale of cost pressure depends on labor market conditions. Thirdly, cost pressures in the tradable goods sector industries are compared in the case of accession to the euro zone and in the case of staying out of it. In our simulation experiments, alternative exchange rate regimes are associated with different degrees of wage rigidities. The study uses CGE models of four CEE countries, namely Czech Republic, Hungary, Poland and Romania, which are expected to join the Euro Area in the future. The models are calibrated to the most recent supply and use tables from WIOD. Quantitative assessments of possible impact of the BS effect on individual industries competitiveness, under alternative assumptions concerning labor market structure and exchange rate regimes.

Keywords: Czech Republic; Hungary; Poland; Romania; General equilibrium modeling (CGE); Monetary issues (search for similar items in EconPapers)
Date: 2017-07-04
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