Testing the Balassa-Samuelson Effect: Implications for Growth and PPP

João Ricardo Faria and Miguel Leon-Ledesma

Studies in Economics from School of Economics, University of Kent

Abstract: The derivation of the Balassa-Samuelson effect allows for different empirical specifications that may have important economic implications. Problems related to spurious regression could arise from the mixed order of integration of the series used and from the lack of a long run stable relationship among the variables of the model. This paper addresses these problems by using the bounds testing approach developed by Pesaran, Shin and Smith (1999). Our empirical results do not show supportive evidence for the Balassa-Samuelson effect in the long run. This seems to suggest that PPP holds. However, one of the implications of PPP is that the real exchange rate does not have any real impact on the economy. Further empirical analysis rejects this implication. In fact, the real exchange rate seems to have a long run impact on relative growth rates.

Keywords: Real exchange rate; Output; Causality (search for similar items in EconPapers)
JEL-codes: C22 F11 F31 (search for similar items in EconPapers)
Date: 2000-09
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (7)

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Journal Article: Testing the Balassa-Samuelson effect: Implications for growth and the PPP (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ukc:ukcedp:0008

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