Balassa-Samuelson Effect Research Articles

Measuring Regional Differences in Living Standards in Russia

The article reflects some of the results of the author’s research on improving the accuracy of statistical assessments of inter-regional differences in the standard of living of the Russian population. Regional differences that have taken place over the past 15 years in the Russian Federation are measured using important indicators of living standards such as average per capita monetary income and final consumption per capita. The author states that the inter-regional differences in the period under review, although present, were quite small and relatively stable over time. Treatment of the results from international comparisons conducted under the auspices of the OECD and according to the author’s calculations related to a set of Russian regions confirms the presence of the Balassa-Samuelson effect. The adjustment of indicators under review to the territorial price index is carried out, as a result of which the level of differentiation of regions becomes noticeably lower, in full accordance with this effect. At the same time, the order of regions in the series ranked by cost of living indicators changes slightly, which leads to the conclusion that the reduction of differentiation by taking into account inter-regional differences in the price level is mainly due to the compression of the range of changes in the monetary indicators of living standards. To check the adequacy of the obtained conclusions, a comparative inter-regional analysis was carried out using some indicators that reflect the standard of living, such as per capita consumption of meat and meat products, housing security, and average life expectancy at birth. To obtain a comparative benchmark for the same set of differentiation measures, differences in living standards are measured for the aggregate of countries in the world as a whole and the aggregate of EU countries in particular. According to the author, the comprehensive use of methods and techniques for inter-regional statistical analysis of the well-being of the population confirms a positive trend in the implementation of one of the directions of current Russian socio-economic policy.

Is the Balassa-Samuelson Hypothesis still relevant? Cross-country evidence from 1950 -2017

Abstract. We revisit the Balassa and Samuelson hypothesis based on the relationship between real exchange rate and total factor productivity relative to the United States and investigate with panel data set of 182 countries from 1950 to 2017. Results, suggest that there is an inverse relationship between the two, an increase in productivity results in an increase in real exchange rate and the findings supports the hypothesis. We use a range of tests including Arellano-Bond Dynamic Panel Data (both fixed and random effect) estimator and findings validates the hypothesis. All these additional tests confirm that the relationship between real exchange rate and relative factor producity are related in the long-run also. Keywords. Balassa–Samuelson effect; Exchange rate, Fixed effect model, Random effect model, Trade and globalization. JEL. C15, E31, F31, F41.

Factors of the Russian ruble exchange rate dynamics in the 2000s and 2010s

The article discusses the key factors of the ruble exchange rate dynamics, analyzes the features of Russian currency market in the context of inflation targeting and the application of the budget rule. The basic theoretical approaches to modeling the dynamics of real and nominal exchange rates are presented, including behavioral models of the exchange rate, the monetary model of the exchange rate, and the hypothesis of uncovered interest parity. The most important factors of long-term and short-term dynamics of the exchange rate are revealed. The results of an econometric evaluation of the models of the real and nominal ruble exchange rates using dynamic least squares method (DOLS) are presented. It is shown that the key factors shaping the dynamics of the nominal ruble exchange rate are the terms of trade, the interest rate spread, the VIX volatility index, and the operations of the Russian Ministry of Finance under the budget rule. The long-term trajectory of the real exchange rate is formed by the terms of trade conditions, the Balassa—Samuelson effect, the dynamics of net foreign assets of the private sector.

The impact of real exchange rates on price competitiveness in Eastern European countries

The subject of this paper is empirical research on studies of exchange rates in Eastern European countries, such as Albania, Bulgaria, Bosnia and Herzegovina, Belarus, Czech Republic, Estonia, Croatia, Hungary, Latvia, Lithuania, Moldova, (North) Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia, in order verify the validity of theories that explain these changes. This research aims to explain the mixed evidence of the Balassa-Samuelson effect in Ukraine, taking into account the intentions of Ukraine to become a member of the European Union. Unlike previous works, the attention is shifted to a review of empirical evidence and the identification of main factors that limit the ability to verify the theory. The main conclusion is that all the currencies studied underwent substantial real appreciations during the study period. Thus, it can be concluded that an adequate monetary policy in countries under study is very important, given that local exchange markets are not sustainable enough and the volatility of exchange operations is higher than in countries with developed economies. However, the Balassa-Samuelson Hypothesis (BSH) can explain the impact of the real exchange rate due to changes in productivity in countries in transition.

In Search of the Lost Balassa–Samuelson Effect – The Changing Role of Services in the 21st Century

It is a generally observed phenomenon that there is a positive relationship between the level of economic development and the general price level. According to the Balassa–Samuelson effect, the convergence observed in the price level is largely achieved through higher services inflation. Based on the update of our previous regression estimation results on the effect, the textbook Balassa–Samuelson effect can be detected less and less in the case of Hungary. Moreover, the phenomenon also shows a similar shift in the case of a wider group of countries. The structural transformation taking place in the world economy nowadays, globalisation and the infocommunication revolution are fundamentally transforming the role, tradability and productivity of services, which also influences the fulfilment of the assumptions of the theory. These factors – in particular with regard to market services – have been assessed in terms of several aspects: based on growth patterns, the role of the services sector in the growth path of modern economies is becoming increasingly important, which is proved by both international and domestic data. Current megatrends – such as globalisation, digitalisation, technological development and artificial intelligence – are accelerating the rising productivity of services and leading to changes in consumer habits and the globalisation of services. New structural shifts affecting the services sector are also transforming the conditions associated with the theory, thus weakening the practical operability of the Balassa–Samuelson effect.

Was the Balassa–Samuelson Effect Small? Uncaptured Quality Improvements and Japan’s Real Exchange Rate Appreciation, 1956–1970

Japan, China, and Central and Eastern European countries experienced substantial real exchange rate appreciation during their catch-up industrialization periods. In each, the measured Balassa–Samuelson effect was small while the greatest source of long-term currency appreciation was the real appreciation in tradables, increases in tradable prices expressed in the common currency, which went counter to PPP. For Japan in the 1950s and 1960s, we suspect price mismeasurement associated with uncaptured product quality improvements in manufactures. Our findings suggest that the Balassa–Samuelson effect would account for three quarters of Japan’s real exchange rate appreciation vis-a-vis the USA then.

Tradable and nontradable directed technical change

ABSTRACT We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale effects can be present or can be partially or totally removed. With a lower skilled labour ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity differences and thus wage inequality. Along the balanced growth path, the real exchange rate can be negatively related with the relative productivities in horizontal innovation (the Balassa-Samuelson effect) and with the relative labour level, depending on scale effects. The wage premium increases due to an increase in the relative labour level in the nontradable sector under substitutability with scale effects or under complementarity without scale effects. A calibrated version of the model indicates that the model closely replicates the data for Germany. Moreover, while the Balassa-Samuelson effect is quantified, an increase in the relative supply of labour in the tradable sector decreases both terms of trade and inequality.

Real effective exchange rate dynamics in Morocco: Exploring Balassa-Samuelson effect under capital account liberalization

Real effective exchange rate dynamics in Morocco: Exploring Balassa-Samuelson effect under capital account liberalization

Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation

Abstract We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. A giant discovery with the value of 10% of a country’s GDP appreciates the real exchange rate by 1.5% within ten years following the discovery. The appreciation starts before production begins and the non-traded component of the real exchange rate drives the appreciation. Labour reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labour productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa–Samuelson effect.

Revisiting the persistence of real exchange rates

In this paper we provide new and robust evidence that panel regressions significantly reduce the estimated half-lives of real exchange rates in a sample of 21 countries. These results are obtained under dynamic panel models that control for non-purchasing power parity (PPP) equilibria. Small-sample bias does not have a significant impact on half-lives, since the increase in the half-life arising from the bias is more than compensated by the decrease of the half-life due to the control of non-PPP equilibria. Among the two sources of non-PPP equilibria, i.e., first, the Balassa-Samuelson effect and second, smooth shifts in mean, we find that, under a heterogeneous panel model, the first source results in a larger reduction of half-lives.

Measuring the Balassa-Samuelson effect: A guidance note on the RPROD database

This guidance note outlines the construction and contents of RPROD. This new database developed by CEPII complements the EQCHANGE database, by providing additional measures of the Balassa-Samuelson effect. RPROD delivers the following indicators computed for each country included in the database, and relative to its main trading partners: (i) GDP per capita, (ii) labor productivity, (iii) consumer-price-to-producer-price ratio, (iv) three-sectors’ value-added deflator, and (v) six-sectors' value-added deflator. These different measures are publicly available (http://www.cepii.fr/CEPII/fr/bdd_modele/presentation.asp?id=34), with the aim to contribute to the investigation of the Balassa-Samuelson hypothesis, and to the comparison of estimated equilibrium real exchange rates and currency misalignments across alternative proxies of this effect.

The Real Exchange Rate and Growth in Latin America

This paper provides evidence on the role played by the real exchange rate in the growth process of emerging economies. The empirical analysis is conducted on a panel dataset of Latin-American countries over the period 1970-2010. We find keeping an undervalued real exchange rate is conducive to higher growth, at least in Granger-causality terms. In addition, we demonstrate how using standard fixed effects and mean-group estimators may lead to misleading inference, in particular on the role of the Balassa-Samuelson effect, because the appropriate estimation strategy should control for both parameter heterogeneity and cross-section dependence. These findings are independent of the particular estimator used, as well as additional regressors employed in the growth literature, or direct measures of the real exchange rate.

Regional effects of inflation targeting in Russia: Factors of heterogeneity and structural inflation rates

Inflation targeting in Russia implies maintaining stable low inflation at a level of 4% throughout the country. The presence of structural factors in some regions can determine deviations from the all-Russian inflation, which can lead to different effects of monetary policy in Russian regions. In this paper, we analyze regional heterogeneity of inflation and factors of inflation deviations from the national average, estimate structural levels of inflation in the regions of Russian Federation. These estimates confirm the presence of some regional factors of inflation deviations from the all-Russian indicator, such as the difference in productivity growth of the tradable and non-tradable sectors (Balassa—Samuelson effect), effective exchange rates, real incomes and product stocks. In addition, our results confirm the presence of regions with price growth rate above and below monetary policy target. The results of this research can be used for the development of monetary and communication policies.

Real exchange rate misalignments in CEECs: Have they hindered growth?

We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European economies. Exchange rate misalignments are computed from country-specific long-run exchange rate relationships with determinants suggested by open macroeconomic models such as interest rate differentials or the Balassa–Samuelson effect. There was a clear reduction in misalignments, but this has been reversed to some extent after 2008. Exchange rate overvaluation has a negative impact on economic activity. The effect of misalignments on economic activity seems to be nonlinear, as overvaluation has a stronger effect than undervaluation. Other factors of economic activity, including institutions, also show nonlinear effects.

Productivity growth, fixed exchange rates, and export-led growth

This paper studies how the fixed exchange rate regime (FERR) may promote growth when a country experiences faster rates of productivity growth in its tradable sector than its nontradable sector. In a simple two-sector model with money, we show that the FERR can reduce the Balassa-Samuelson effect if wage adjustment is subject to nominal rigidities. The undervaluation thus created suppresses real wage growth but increases the size of the tradable sector and leads to higher growth rates of the entire economy. Using cross-country panel data, our econometric exercises provide robust evidence that supports the results. Meanwhile, other fundamentals, including the external balance position, export share in the tradable sector, and the stage of development, play roles in determining the effects of FERR. Last, we apply the empirical results to run simulations on China from 1994 to 2007 to highlight the role of FERR in the country's export-led growth.

Regional inequality in urban China, allowing for spatial cost of living differences: Evidence from a hedonic analysis of apartment prices

AbstractStudies of inequality in China typically ignore cost of living differences between areas. Under the Balassa–Samuelson effect, nontradeables cost more in richer areas, so nominal inequality exceeds real inequality. This especially matters in China, where spatial cost of living differences should grow with recent development of urban housing markets. We use new data on apartment prices in 104 cities in China to develop housing‐related spatial deflators. The level of spatial inequality in urban China is overstated by 27% if cost of living differences are ignored. Our hedonic analysis of 41,000 individual apartment sales shows that most price variation is between areas, rather than from features of individual apartments. The dominant trend in the reform era is for regional inequality in China to decline, contrary to the common perceptions. In nominal terms, the Theil index for interprovincial inequality in 2016 is just 46% of its 1978 level. The current results imply that the fall in inequality in real terms would be even greater.

Determinants of price level differences in Russian regions

ABSTRACTWe examine the factors determining regional price differentiation in the Russian Federation. According to official statistics, the price of a fixed set of goods and services in different regions may currently differ more than two-fold. Employing panel data analysis for 2000–2015, we find differences in regional prices were caused by the following factors: the Balassa–Samuelson effect (differences in wages, regional economic structure, income structure); regional trade costs (distance of the region from other regions); and the level of monopolisation of retail trade. The results obtained in the article can be used in developing and implementing economic policy aimed at the reduction of poverty, in assessing the efficiency of transport and logistical projects, and also in developing and analysing the consequences of monetary policy. Taking into account price differences between regions can therefore improve accuracy in forecasting the consequences of measures of monetary policy.

The Balassa-Samuelson effect reversed: new evidence from OECD countries

This paper reconsiders the Balassa-Samuelson (BS) hypothesis. We analyze an OECD country panel from 1970 to 2008 and compare three data sets on sectoral productivity, including newly constructed data on total factor productivity. Overall, our within- and between-dimension estimation results do not support the BS hypothesis. For the time since the mid-1980s, we find a robust negative relationship between productivity in the tradable sector and the real exchange rate, even after including the terms of trade to control for the effects of the home bias. Earlier, supportive findings may depend on the choice of the data set and the model specification.

Political Risk and Real Exchange Rate: What Can We Learn from Recent Developments in Panel Data Econometrics for Emerging and Developing Countries?

This paper focuses on the analysis of the long-run response of the Real Exchange Rate (RER) to political risks and tests whether non-economic variables have an impact on RER in 31 emerging and developing countries. We use annual data from the International Country Risk Guide database over the 1984 to 2016 period. Based on the recently developed method of Cross- Sectionally Augmented ARDL approach of Chudik and Pesaran (2015b), and the panel threshold estimation of Chudik et al. (2017) our main findings are the following: i) countries experiencing a high degree of corruption, a high risk to investment, or a high degree of political instability tend to experience a real exchange rate depreciation, ii) there exists strong evidence for a threshold effect on the relationship between investment profile-RER, corruption-RER and political instability-RER. Specifically, political instability and corruption adversely affect real exchange rate especially when they exceed the threshold. iii) the effects of bureaucracy, law, and order seem to be statistically insignificant on the RER. Our findings are robust to the inclusion of the Balassa-Samuelson effect in the estimated equations.

Sectoral Decomposition of the Balassa–Samuelson Effect in CEE Countries: A CGE Analysis

We examine the impact of the Balassa–Samuelson effect on prices at the industry level, based on the results of computable general equilibrium (CGE) model simulations for four Central and Eastern European (CEE) countries. We decompose the results to explain the differentiation of impact on unit production cost by industry. We find that direct cost savings from productivity improvement typically exceed the effects of higher wages, even when considering the reciprocal effects of increased prices of nontradables. These effects are negative for the price competitiveness of the tradable industries and can be reduced by procompetition regulation in the nontradable sector.