The Impact of the Balassa-Samuelson Effect on the Real Ruble Exchange Rate: The Assessment

Abstract

The article presents an empirical investigation of the impact of the Balassa-Samuelson effect on the real ruble appreciation in 1999-2007. We consider long-run, supply-side determinants of the real ruble exchange rate, such as changes in terms of trade and labor productivity. Using Russian and German data on price and productivity differentials between tradable and non-tradable sectors of the two economies, we estimate the significance of oil price shocks and the Balassa-Samuelson effect for the real ruble appreciation. Our study demonstrates that, on average, about 1/3 of the observed appreciation can be attributed to the Balassa-Samuelson effect. The cointegrating relationship between the productivity differential and the real exchange rate provides evidence of the healthy nature of the economic growth, which took place in Russia during the time period under investigation. These findings suggest that exchange rate adjustments should be used by the Central Bank of Russia mainly as a monetary policy instrument for fighting inflation rather than as a tool for competitive devaluations.