Real Exchange Rate Movements in Developed and Developing Economies: A Reinterpretation of the Balassa-Samuelson Hypothesis*

Abstract

This article applies panel-data techniques to examine the Balassa-Samuelson hypothesis (BSH) for 33 countries. We introduce a new approach for classifying traded and non-traded industries which allows for country-specific heterogeneity over each industry and changes in classifications across periods. We find that in developed countries, productivity growth in traded goods leads to a real depreciation of the currency, inconsistent with the BSH; however, higher growth countries experience real appreciation. The results of developing countries support the BSH in that higher productivity growth in traded goods leads to real appreciation.