The Balassa–Samuelson effect in Central and Eastern Europe: myth or reality?

Abstract

This paper studies the Balassa–Samuelson effect in nine Central and East European countries. Using panel cointegration techniques, we find that the productivity growth differential in the open sector leads to inflation in non-tradable goods. Because of the low share of non-tradables and the high share of food items in addition to regulated prices, the consumer price index is misleading when analyzing the Balassa–Samuelson effect. Consequently, the appreciation of the real exchange rate, which has been established as a stylized fact over the last decade, is caused only partly by the Balassa–Samuelson effect. We identify a trend increase in the prices of tradable goods as a contributing explanation.