Abstract
The ability of the Baltic States to damp the growth of inflation might partly depend on the scale of the Balassa-Samuelson (BS) effect. In recent years, inflation was lower in the Baltic States as compared to the beginning of the transition period. This raises the question whether the BS impact on inflation is still relevant. Based on an empirical assessment, this paper aims to provide some recent evidence concerning the productivity growth pattern in the tradable and non-tradable sectors in the new Member States vis-a-vis the euro area. Thus, the paper analyses whether the main assumptions in the Balassa-Samuelson effect of a higher growth of productivity in the tradable sector and a higher wage growth in the non-tradable sector have come true.
Highlights
Based on an empirical assessment, this paper aims to provide some recent evidence concerning the productivity growth pattern in the tradable and non-tradable sectors in the new Member States vis-a-vis the euro area
In the period from 1996 to 2004, the intersector productivity growth differences were bigger in the Baltic States compared to the euro area
A higher growth in both sectors' productivity suggests that there has been a strong convergence in productivity growth in the Baltic States relative to the euro area in terms of the productivity level
Summary
The ability of the Baltic States to damp the growth of inflation might partly depend on the scale of the Balassa-Samuelson (BS) effect. The differences in productivity growth in the tradable and non-tradable goods sectors in the new Member States have frequently emerged in the economic debates as a significant reason why inflation in the new Member States might be higher than in the euro area. As productivity grows faster we expect the productivity gap between the tradable and non-tradable sectors to widen This will put up wage pressures in the nontradable sector, leading to increased inflation. Most studies investigating the BS effect in the Baltic States apply a measure of prices of tradable / non-tradable goods relative to the productivity gap in tradable and the non-tradable sectors. The increase in oil prices did not have a similar effect in the Baltic States, as the non-tradable sector inflation has stayed above the tradable sector inflation since the beginning of 2005. Chart 1: Inflation in tradable and non-tradable sectors, 1998-2006 Source: Eurostat
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