Balassa-Samuelson Effect Research Articles

Revisiting the Balassa–Samuelson effect: International tourism and cultural proximity

This article focuses on a neglected part of the well-known Balassa–Samuelson (B-S) effect in international trade, namely, the specific role of tourism in equilibrating the purchasing power parities across areas. The article aims to highlight in particular the cultural bias in destination choice by foreign tourists and its importance as a barrier for eradicating economic inequality between countries. We consider international tourism here as a mixed type of tradable service that leads to – short-time, but potentially massive – cross-border movements of people that can impact income redistribution among countries. Our claim is that this short-time movement is positively biased towards culturally closer localities. The recognition of this role of cultural proximity in the tourist choice destination can help fine-tune empirical models of international goods or services to reality. To test our hypothesis, a unique big data set for the EU28 and all the Organisation for Economic Co-operation and Development (OECD) countries (4031 observations on the shares of outbound tourists per country) is composed for the year 2014. We use data from the UN World Tourism Organization, Centre d’Etudes Prospectives et d’Informations Internationales (CEPII, Paris; especially on linguistic proximity), and the six well-known Hofstede indices of cultural dimension: individualism, power–distance relationship, masculinity, uncertainty, indulgence and long-term orientation. To fully specify our tourist destination model, we include also climate-related explanatory variables, reflecting sun, rain and wind differences between sending and recipient countries. Regression analysis with fixed effects and a hierarchical (multilevel) model both lead to consistent empirical estimates. Our results clearly demonstrate that tourism is a significant counter-balancing factor for the B-S effect that seems to be present and related to non-trade sectors and wages across the countries involved. Moreover, we find that linguistic proximity is statistically and economically the most powerful quantitative proxy for cultural factors, which determine the outbound tourists’ destination choice.

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 1984–2016 period. Based on the recently developed method of cross-sectionally augmented ARDL approach of Chudik and Pesaran (J Econ 188:393–420, 2015b), and the panel threshold estimation of Chudik et al. (Rev Econ Stat 99(1):135–150, 2017) our main findings are the following: (1) 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, (2) 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. (3) 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.

패널공적분검정을 통한 발라사-사무엘슨 효과 분석

패널공적분검정을 통한 발라사-사무엘슨 효과 분석

Re-exploration of the Roots of RMB Appreciation: Back to Marxism

The long-term appreciation of RMB is rooted in the improvement of China’s relative labor productivity. On the basis of using and comparing the Marxist exchange rate theory deduced from Marxism Labor Value Theory and the Balassa-Samuelson model, we try to explore the inherent logic of exchange rate changes affected by relative labor productivity, which is different from the traditional research perspective. According to the classification and the related data of trade and non-trade sectors, the dynamic panel model is used to study the effects that relative labor productivity of China and its major trading partners, and relative productivity of any two sectors within each economy entity have exerted on RMB exchange rate. There are several conclusions: First, the improvement of labor productivity is the fundamental motive force for a country’s currency appreciation. The improvement in labor productivity, whether it is the trade sector or the non-trade sector, can steadily increase the exchange rate of a country, hence justifying the long-term appreciation of RMB and its magnitude. Second, due to the factors like the development stage, the economic structure, the exchange rate system, the Balassa-Samuelson effect is not significant in China and in the sample of selected economies, but we find that the Marxist exchange rate theory can better explain the appreciation of the RMB, therefore using such theory. Third, basic variables of one country, which include the degree of openness and the growth rate of GDP per capita, will also have different degrees of influence on exchange rate changes. Therefore, high-quality economic development is the key to enhancing currency value, attracting international capital and improving international competitiveness. In this process, we should speed up the transformation of the way of economic development and promote full employment. We should also ensure the simultaneous adjustment of wages and labor productivity while promoting the free flow of labor and capital. It is also necessary to deepen the market-oriented reform of the education and medical departments and reduce market monopolies in railway, real estate, postal and other industries so as to promote reasonable adjustment and effective formation of exchange rates. Besides, in order to increase openness and strengthen communication and integration between China and the world, we should apply effective communication mechanisms to remove various trade barriers and reduce trade disputes.

Why are nontraded goods cheaper in poor countries?

Balassa and Samuelson argued that production technologies differ among countries, and the price of the nontraded good is higher in countries with higher labor productivity. This paper shows that the Balassa-Samuelson effect exists even when countries share identical production technologies. In the celebrated Heckscher-Ohlin model, changes in factor endowments do not affect the equalized factor prices. This paper considers a three-factor, three-industry model, and demonstrates that endowment differences between countries can cause disparities in their wage rates and the prices of the nontraded good. A dynamic panel data analysis shows that a 10% increase in per capita real GDP results in a 2% increase in the housing price for non-EU OECD countries.

The impact of income, economic openness and interest rates on housing prices in China: evidence from dynamic panel quantile regression

ABSTRACTThe rapid growth of housing prices has attracted the attention of the whole of society in China. This article adopts the dynamic panel quantile regression to investigate the impact of income, economic openness and interest rates on housing prices in China, based on the panel data of 35 major cities from 2002 to 2012. Compared with previous studies, we can more precisely and reasonably discuss the impact of these variables on different levels of housing prices. The empirical results indicate that the impact of independent variables on housing prices is heterogeneous across quantiles. Specifically, the impact of income is positive and significant across quantiles, and the impact becomes greater at the 90th and 95th quantiles. Economic openness has a positive and significant effect at the 5th–80th quantiles, which support the Balassa–Samuelson effect, but it is insignificant at the 90th and 95th quantiles. The impact of interest rates is positive and significant at low quantiles, but the impact is negative and insignificant at high quantiles. Furthermore, we also find that the coefficients of interest rates at various quantiles are smaller. In addition, the population has a significant positive effect across quantiles. Finally, we provide important policy implications.

Population Age Structure, Urbanization and Real Exchange Rate: An Empirical Study Based on G20’s Panel Data

This paper examines the internal transmission mechanisms of population age structure and urbanization to real exchange rate based on G20’s panel data over 1993-2016 periods. “Balassa-Samuelson effect” and “Factor endowment effect” are main channels that population age structure affect U.S dollar real exchange rate, and “demand structure effect” is not significant. The improvement of urbanization rate has significant positive effect on U.S dollar real exchange rate through “Balassa-Samuelson effect” and “Factor endowment effect” has significant negative effect on U.S dollar real exchange rate through “demand structure effect”. On the basis of theoretical and empirical analysis, we put forward suggestions to suppress the negative effects of aging on productivity.

Roads and the Real Exchange Rate

This paper studies the effect of transport infrastructure on the real exchange rate (RER) and reaches two relatively strong conclusions. First, while the list of robust determinants of the RER is not long, transport infrastructure belongs to that list. Many other potential determinants proposed in the literature, such as net foreign asset position or terms of trade, turn out to be not robust. Second, in terms of economic significance, the infrastructure effect follows closely the well-known Balassa-Samuelson effect and is one of the most important explanatory variables for RER movements, especially in developing countries.

China’s rapid growth and real exchange rate appreciation: Measuring the Balassa-Samuelson effect

The real exchange rate of the Chinese yuan vis-à-vis the U.S. dollar appreciated by 4.6% per year from 2005 to 2015 after a period of stability (1996–2004). The fast appreciation may appear to be a classic case of the Balassa-Samuelson effect. China during this period was on a path of manufacturing-led rapid growth and technological catch-up. As expected, there was a large difference in total factor productivity growth between the tradable and nontradable sectors, which contributed to real exchange rate appreciation. However, a decomposition of the annual 4.6% real exchange rate appreciation reveals that the magnitude of the Balassa-Samuelson effect was relatively small at 1.2 percentage points. The more important factor was real appreciation in the price of tradables (a rise in the price of China’s tradables relative to U.S. tradables) at 4.4 percentage points. This pattern—a modest Balassa-Samuelson effect and a large real appreciation in the price of tradables—was also present in Japan and Central and Eastern European transition economies, all of which experienced long-term real exchange rate appreciation during their high growth periods. China’s recent case adds to evidence that the magnitude of the Balassa-Samuelson effect is usually modest and does not account for the bulk of observed rapid real exchange rate appreciation in high growth economies.

///, // Balassa-Samuelson (Balassa-Samuelson Effect in Won/Dollar and Won/Yen Exchange Rates)

Korean Abstract: 본 연구에서는 원/달러, 원/엔 환율의 구매력 평가(PPP: Purchasing Power Parity)가설에 있어서 Balassa-Samuelson(BS) 효과를 선형 및 비선형 모형을 통하여 분석하였다. 우선 PPP 가설에 있어서의 BS 효과를 검증하기 위하여 원/달러, 원/엔 실질환율과 우리나라 및 외국의 생산성 지표간의 관계를 Johansen의 공적분 방법을 사용하여 분석하였다. 그 결과, 원/달러, 원/엔 실질환율 공히 국내 및 외국의 생산성 지표와의 사이에 공적분 관계가 존재하고 추정 부호도 BS 효과가 예상하는 결과를 얻었다. 또한 BS효과를 반영하는 생산성 격차 지표 이외에 누적 경상수지, 외환 보유액, 교역조건 등 원/달러, 원/엔 실질환율의 결정에 영향을 줄 것으로 추정되는 기초 경제변수들을 포함하여 행태적 균형 환율을 추정한 결과에 있어서도, 원/달러, 원/엔 실질환율 공히 모든 이들 변수와의 사이에 공적분 관계가 존재하는 것으로 나타났으나, 이 경우에는 생산성향상이 실질환율의 평가 절하를 가져오는 것으로 추정되어 BS 효과가 예상하는 부호에 부합되지 않았다. 마지막으로 우리나라 실질환율에 있어서 BS 효과를 반영한 장기균형 환율로의 조정과정이 비선형적 프로세스를 따르는지 여부를 검증한 결과, 원/달러의 경우에는 LSTAR 모형에 의한 비선형적 조정과정을 보이는 것으로 분석되었다. 그러나 자기상관 등의 진단검증 결과를 고려할 때, LSTAR 모형 추정의 적합성에 문제가 있는 것으로 나타났다. English Abstract: This paper examines, using various models including a non-linear one, that the Balassa-Samuelson (BS) effect can account for the persistence of deviations from PPP in the long-run movements of won/dollar and won/yen real exchange rates. In test for PPP hypothesis that incorporates the BS effect, using the generalized Johansen’ cointegration method, it is found that a cointegration relationship exists between each of won/dollar and won/yen real exchange rate and the productivity variables of two countries. And in test for PPP hypothesis that incorporates other fundamentals such as cumulative current account balance, foreign exchange reserve, terms of trade as well as productivity differentials, using a behavioral equilibrium exchange rate approach, it is found that a cointegration relationship exists between each of won/dollar and won/yen real exchange rate and all of these fundamentals. However, the plus sign of the estimated coefficient of the productivity differentials variable, which means that domestic productivity improvement produces increase in each of won/dollar and won/yen real exchange rate is not coincident with the result that the BS effect expects theoretically. Finally, in test for PPP hypothesis that incorporates the BS effect, using a non-linear STAR model, it is found that the adjustment process in case of won/dollar real exchange rate from the long-run equilibrium level can be adequately explained by a non-linear LSTAR model. But, the evidence of diagnostic statistics, which shows the existence of autocorrelation of the residuals in most of lags, might suggest the inadequacy of LSTAR model specification.

Estimating the Equilibrium Real Exchange Rate in Algeria during the period: 1980-2015

The aim of this paper is to estimate the long-run Equilibrium Real Exchange Rate (ERER) path using VECM approach, and assesses the degree of misalignment in Algeria. Based on annual data from 1980 to 2015, our results show that the macroeconomic variables such as terms of trade, trade openness, differential productivity with trading partners (Balassa-Samuelson effect), real price of oil, and government expenditures, plays significant role in determining the equilibrium of Algeria’s ERER, the results also reveal that Algerian economy suffered from RER misalignment. As finding, and according to the Edwards’ [6] Model and the Cashin’s [2] model, results showed same evidences that there are three episodes of undervaluation of the Algerian dinar’s and also three episodes of overvaluation, the seventh episode (2004-2015) shows that the Actual ERER appears to have been close to its estimated equilibrium.

TREND INFLATION AND MONETARY POLICY IN EASTERN EUROPE

I use a two-country dynamic stochastic general equilibrium (DSGE) model with a nonzero steady-state inflation to study monetary policy in transition economies. In particular, my analysis focuses on whether inflation targeting is based on a consumer price index (CPI) or its producer counterpart, producer price index (PPI). This issue is specifically relevant for transition economies as they might be subject to Balassa–Samuelson effects arising from trading in international markets. Under these circumstances, domestic inflation is possibly higher than imported inflation, hence targeting PPI inflation may prove more effective in influencing domestic macroeconomic variables than targeting CPI inflation. Using a Bayesian methodology, I find that the central banks of three Eastern European countries (namely, the Czech Republic, Hungary, and Poland) are likely to target PPI inflation rather than CPI inflation. This result is in line with the theoretical predictions in the literature, and is robust across several Taylor-type rules.

A Study into the Equilibrium Exchange Rate of RMB

Beginning from the classical theory of purchasing power parity, we will probe into the reasonability of RMB exchange rates step by step. Purchasing power parity requires that the de facto exchange rate should remain constant, which is not true in reality, because real impact, such as productivity improvement, would change the de facto exchange rate. The Balassa-Samuelson effect makes amendment to this theory; however, its conclusion is just the opposite of China’s condition, which implies productivity improvement may lead to the rise of the de facto exchange rate. This article makes an in-depth analysis of that theory and modifies the hypothesis. Finally we make a theoretical model on RMB's de facto exchange rate conforming to China’s condition and make verification based on the current situation, which gives a good explanation of the fluctuation of RMB exchange rate empirically.

The real exchange rate in the long run: Balassa-Samuelson effects reconsidered

Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.

A European Disease? Non-tradable Inflation and Real Interest Rate Divergence

This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. it then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA.

Beyond Balassa and Samuelson: real convergence, capital flows, and competitiveness in Greece

To better understand the convergence process prior and since the European financial and debt crisis, we scrutinize the role of capital flows for competitiveness in Greece and a set of six other euro area member countries (Portugal, Latvia, Estonia, Lithuania, Slovenia and the Slovak Republic). For this purpose the paper extends the seminal Balassa–Samuelson model by international capital markets with a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to make real wages increase beyond productivity increases. The augmented Balassa–Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 reveal correlations in line with the Balassa–Samuelson effect, if Greece is excluded from the panel. For Greece, this in turn implies indication in favour of a credit-driven real wage increases beyond productivity increases what we call a “pseudo” Balassa–Samuelson effect.

Beyond Balassa and Samuelson Real Convergence, Capital Flows, and Competitiveness in Greece

We scrutinize the role of capital flows in competitiveness in a set of seven euroarea member countries (Estonia, Greece, Latvia, Lithuania, Portugal, Slovenia, and the Slovak Republic) in the context of real convergence and crisis. A specific focus is on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets, placing a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to cause real wages to increase beyond productivity increases. The augmented Balassa-Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 show evidence of the Balassa-Samuelson effect if Greece is excluded from the panel. For Greece, this in turn provides evidence in favour of capital inflow-driven real wage increases in excess of productivity increases.

Validity of Absolute Purchasing Power Parity in G7 Countries

In popular studies, the theory of relative purchasing power parity (PPP) is tested for the real exchange rates (RERs) that are constructed by price indexes. In this paper, we construct the bilateral RERs by general price levels and study the absolute PPP theory in G7 countries. Coefficient restriction and RER misalignment distribution tests reveal that absolute PPP holds for the RERs of Canada, France, Germany, and Japan against the US in the whole samples. For the RERs of Italy and the UK against the US, we find the Balassa-Samuelson effect’s modification to the absolute PPP theory in the sub-samples.

The price of development: The Penn–Balassa–Samuelson effect revisited

The Penn–Balassa–Samuelson effect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price–income relation is actually non-linear and turns negative among low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result. Rather, the different stage of development between countries can explain this new finding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data. This provides additional understanding of real exchange rate determinants in developing countries.

Real Currency Appreciation in Accession Countries: Balassa-Samuelson and Investment Demand

The Balassa-Samuelson effect is usually seen as the prime explanation of the continuous real appreciation of central and east European (CEE) transition countries' currencies against their western counterparts. The response of a small country's real exchange rate to various shocks is derived in a simple model. It is shown that productivity shocks work not only through a Balassa-type supply channel but also through an investment demand channel. Therefore, empirical evidence apparently in favour of Balassa-Samuelson effects may require a re-interpretation. The model is estimated for a panel of CEE countries. The results are consistent with the model, plausibly explain the observed real appreciation and support the existence of the proposed investment demand channel.