Abstract
AbstractThis paper studies the Balassa–Samuelson effects in two areas with strong differences in economic development, sixteen OECD countries and sixteen Latin American economies. The USA is taken as a benchmark. Applying recent panel cointegration and bootstrapping techniques that solve for cross-sectional dependence and small panel size problems, we find some evidence for not rejecting the whole hypothesis in the LA area. In the context of OECD group, the second stage of the BS hypothesis, which relates relative sector prices with the real exchange rate, does not hold, probably because national markets remain to some extent segmented, as reflected in departures from PPP in the tradable sectors.
Highlights
Paper submitted to the special issue “Using Econometrics for Assessing Economic Models” edited by Katarina Juseliu
We find that while the first stage of the hypothesis, which links the difference between the productivities with the difference in prices of the tradable and non-tradable sectors, is satisfied in each group of countries, the second stage, which relates the price differential with the real exchange rate, holds in the Latin American area, but not in the group of the OECD countries as a whole
Putting together the results for all the individual countries of our sample, it follows that the entire Balassa and Samuelson (BS) hypothesis clearly holds in five Latin American countries and perhaps in three OECD economies
Summary
In this paper we test the BS effect by looking at two areas differing substantially in development and growth: sixteen OECD countries, on the one hand, and sixteen Latin American economies, on the other hand. We find that while the first stage of the hypothesis, which links the difference between the productivities with the difference in prices of the tradable and non-tradable sectors, is satisfied in each group of countries, the second stage, which relates the price differential with the real exchange rate, holds in the Latin American area, but not in the group of the OECD countries as a whole. Despite the fact that statistical significance of the empirical results seem sensitive to the level of economic development of the areas analysed, to our knowledge no empirical study attempts to compare the fulfilment of the BS hypothesis in two areas which exhibit sharp differences in standards of living and growth with respect to a common foreign developed country To fill this gap, we undertake such a comparative analysis in the context of sixteen OECD countries and sixteen Latin American economies.
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