A Dynamic Theory of The Balassa-Samuelson Effect

Harutaka Takahashi and Alain Venditti

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Abstract: The Balassa-Samuelson effect is still an important phenomenon in the theory of economic development, as Balassa states, "As economic development is accompanied by greater inter-country differences in the productivity of tradable goods, differences in wages and service prices increase, and correspondingly so do differences in purchasing power parity and exchange rates." To the best of our knowledge, the Balassa-Samuelson effect has not been formally examined in the framework of optimal growth theory. By embedding the Balassa-Samuelson's original model in an optimal growth model setting, we investigate the validity of the Balassa-Samuelson effect in such a case and show that the Balassa-Samuelson effect follows from one of the properties of the optimal steady state.

Keywords: Two sector optimal growth; optimal steady state; saddle-point stability; phase diagram; Hamiltonian; capital intensity (search for similar items in EconPapers)
Date: 2023-12-04
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Working Paper: Dynamic Theory of The Balassa-Samuelson Effect (2023)
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