Balassa-Samuelson Hypothesis Research Articles

Revisiting Balassa-Samuelson Hypothesis for Asia – A Critical Appraisal of Literature

Purpose: The present study is aimed at presenting a critical appraisal of the empirical literature on the Balassa-Samuelson hypothesis for emerging and developing Asian countries. Design/methodology/approach: A critical appraisal of the relevant studies is carried out across various important dimensions of the empirical estimation of the Balassa-Samuelson hypothesis including the scheme of sectoral division followed, definitions and proxy variables used for constructing real exchange rate and price series, choice of output and employment series and their subsequent transformation, empirical methodology followed and (theoretically) different variants of the hypothesis chosen for empirical estimation. Findings: Only a handful of studies have investigated the Balassa-Samuelson hypothesis for Asia. Nevertheless, these studies are characterized by a variety of irregularities in dealing with different important features of the theory, which may be of critical importance for yielding consistent empirical estimates. In multi-country studies for Asia, serious inconsistencies are observed whilst handling these critical aspects of the hypothesis. Such irregularities may hold serious implications for model estimates since the empirical evidence from Asia is very mixed, and in many cases, not even robust. Practical implications: The inconsistencies highlighted in this review paper hold strong implications for future research in this area. The selection of price indicators for the construction of real exchange rate series, choice of econometric methodology and the theoretical framework followed are aspects of the empirical verification of the Balassa-Samuelson hypothesis that need to be handled with great caution since they turn out to be most sensitive in relation to yielding intuitively correct and robust model estimates. Originality: To our knowledge, so far, no study on Asia has presented such an extensive appraisal of literature on the productivity-real exchange rate nexus. The present study is therefore novel in the sense that it critically evaluates studies on Asia against all those features of the Balssa-Samuelson theory which may stand responsible for yielding mixed and even contrasting empirical estimates for Asia.

Productivity and real exchange rates for India: does Balassa-Samuelson effect explain?

PurposeThis study aims to explore the long-run equilibrium relationship between India’s real exchange rate and sectoral productivity trends using internationally comparable KLEMS databases on productivity for India, China, Euro area, the USA, the UK and Japan.Design/methodology/approachThis study uses pooled mean group estimations for panel data suggested by Pesaran et al. (1999). This method is chosen because of the presence of variables with different orders of integration.FindingsThe results find support for an “extended” Balassa–Samuelson (BS) hypothesis which allows labour market frictions that does not allow for wage equalisation between traded and non-traded sectors within a country. This mechanism continues to find some support when we separate out distribution sector that comprises wholesale and retail trade in the domestic services sector. The empirical evidence suggests that India’s real exchange rate is anchored to domestic fundamentals and is closely aligned to its fair value over a medium to long-time horizon.Originality/valueTo the best of the authors’ knowledge, unlike the available literature, which uses aggregate per-capita income as proxy for a country’s productivity growth, this paper perhaps makes the first attempt to validate the BS hypothesis by accounting for productivity differential at the sectoral levels using KLEMS data across countries. Moreover, this study takes the country’s productivity improvement rather than using a basket of countries, a prevalent practice in the literature. While this paper uses India’s data, which witnessed a prolonged appreciation in its real effective exchange rate and rapid technological progress, the authors believe its findings and policy implications could be applicable to the similar emerging market economies.

The impact of estimated sub-national purchasing power parity on macroeconomic measures1

Due to the lack of Purchasing Power Parities (PPPs) at sub-national level, regional Gross Domestic Product (GDP) figures have been traditionally adjusted using national PPPs. The simplifying assumption that there are no regional differences in a country, and implicitly that all regions of a country have the same cost of living, might lead to regional GDP figures (adjusted for national PPPs) that are biased and might limit the design and implementation of regional policies. This paper tries to overcome this problem by estimating PPPs at sub-national level for OECD countries (TL2 regions) and EU-27 countries (NUTS2 regions) for a time series 2000–2018 through an econometric method, which uses publicly available data and is based on the Balassa-Samuelson hypothesis. This paper also presents the implications of adjusting regional macroeconomic figures with sub-national PPPs in terms of economic welfare, regional convergence and the impact on EU cohesion funds.

Another Prospective on Real Exchange Rate and the Traded Goods Prices: Revisiting Balassa–Samuelson Hypothesis

This paper proposes a new variant and reinvestigates the validity of the Balassa–Samuelson (BS) hypothesis for nine East and South Asian countries under new specifications. The BS hypothesis is often criticized for one of its fundamental, but oversimplified assumptions related to Purchasing Power Parity (PPP) holding which can be confirmed for cronss-country tradables’ prices, implying nontraded-sector prices are solely responsible for inducing trend deviations in real exchange rate. The assumption, when empirically tested, does not always hold valid, revealing a price difference in tradables for Asian countries against the world (U.S.), a potential driver of their trend in real exchange rate deviations (appreciation). A new approach based on Fully Modified OLS (FMOLS) and Dynamic OLS (DOLS) is used to estimate the long-run BS coefficients, while the error correction mechanism is employed to estimate the short-run estimates. These results motivated us to allow for the inexistence of PPP for cross-country tradables; the standard form of the BS model is then tested in its relaxed form using time-series and panel data econometric tests. Despite a relaxing of the BS model in favor of tradables’ price deviation from PPP, the results are not sufficiently supportive of the BS hypothesis. These findings hold strong economic implications for Asia, suggesting that intercountry sectoral productivity bias of regional economies with the world does not necessarily exert substantial effects on their long-run real exchange rates. Additionally, contrary to the core belief of the BS model, intercountry tradables’ price differentials are found to substantially explain real exchange rate movements away from their long-run equilibrium.

Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps

Abstract This study analyzes the relationships between domestic and foreign output gaps, current-account imbalances, and real effective exchange-rate (REER) misalignments. We first set up a theoretical framework based on the elasticities and absorption approaches of the balance of payments to derive and clarify these relationships. Next, we perform panel VAR estimates in a sample of 18 advanced economies between 1986 and 2017. We find an inverse relationship between domestic output gaps and current accounts with reciprocal influences between the two variables. Moreover, we observe that increases in current accounts generally boost both temporary and structural growth. Additionally, our results indicate that REER misalignment shocks cause reactions of the opposite sign on the current account and on cyclical economic growth. We also find evidence of higher growth resulting in a real exchange-rate appreciation, which supports the Balassa–Samuelson hypothesis.

OECD ÜLKELERİNDE REEL DÖVİZ KURU HAREKETLERİNİN AÇIKLANMASINDA BALASSA-SAMUELSON ETKİSİ

According to Balassa-Samuelson hypothesis which explains real exchange rate movements by productivity differences between tradable and non-tradable sectors, an increase in the relative productivity of tradable sector leads to a real appreciation of domestic currency. In this study, we analyze whether the Balassa-Samuelson hypothesis is valid employing recent panel data tehniques for a panel data set covering 25 OECD countries and the period 1990-2016. To this aim, the effect of sectoral relative productivity on real exchange rate is examined employing panel data estimators considering country heterogeneity, dynamic behavior and cross-section dependency. Results of Pooled Mean Group estimations support the Balassa-Samuelson hypothesis for OECD countries. However, the effect of relative productivity on real exchange rate becomes statistically insignificant when we control the cross-section dependency that arises due to common global shocks by employing Cross-sectionally Augmented Panel ARDL estimator (Chudik and Pesaran, 2015). Consequently, Balassa-Samuelson hypothesis cannot be robustly supported for OECD countries.

VERİMLİLİK YANLILIĞI HİPOTEZİNİN GELECEK 11 ÜLKESİ İÇİN İNCELENMESİ

One of the reasons of deviation from Purchasing Power Parity is the Productivity Bias Hypothesis (PBH) that is also known as Balassa-Samuelson Hypothesis which is based on Balassa (1964) and Samuelson (1964). Productivity Bias Hypothesis implies that productivity causes a real appreciation in currency of a relatively more productive country. Mechanism can be briefly summarized as follows: Productivity increase in tradable sector increases wages in this sector and due to labor mobility across sectors wages in non-tradable sectors rise. Then, prices increase and finally exchange rates rise. Due to relatively high growth rates and productivity increases emerging countries can be good samples to investigate the hypothesis. The purpose of this study is to investigate the validity of Productivity Bias Hypothesis for Next 11 countries (Bangladesh Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, Phillipines, Turkey and Vietnam). Autoregressive Distributed Lag method (ARDL) of cointegration is used to analyze time series data. Empirical results suggest that the hypothesis is supported in Bangladesh, Indonesia, Turkey and Vietnam for the considered period of time. The policy implications are provided as well.

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.

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.

Does productivity drive the real exchange rate movements? A re-examination of the Balassa–Samuelson hypothesis

PurposeThe primary purpose of this study is to examine whether the classification of industries into the tradable and nontradable matters for the Balassa–Samuelson (BS) effect.Design/methodology/approachThe study uses annual data for 38 countries from 1995 to 2014. To examine whether the classification of industries matter, the study proceeds with two approaches, that is, “traditional” and “benchmark”.FindingsFirst, by applying panel cointegration tests of Pedroni and Westerlund, the results validate the BS hypothesis. However, the coefficients of long-run elasticities show appreciation of real exchange rate (RER) due to increase in productivity in the case of “traditional approach”, whereas depreciation of RER in the case of “benchmark approach”. Second, by applying the Dumitrescu-Hurlin panel Granger causality test, the results reveal the bi-directional causality among RER and productivity for both the approaches. Further, to provide more insights, the study employs a fixed-effects panel threshold model. The results indicate that increase in productivity leads to both appreciation and depreciation of RER depending on threshold regimes.Practical implicationsThe study ascertains that the evidence of BS effect depends on the choice of approach considered. However, irrespective of the classification, there exists a BS effect beyond a threshold.Originality/valueAlthough the BS effect is well established in the literature; there is no study examining the importance of classification of industries at a disaggregated level. Furthermore, there is no consideration of threshold effects.

Testing the productivity bias hypothesis for Brazil

Purpose- Productivity Bias Hypothesis (Balassa-Samuelson hypothesis) implies that currency appreciates in a relatively more productive country. The focus of this study is to test productivity bias hypothesis for Brazil by employing time series data over the period 1980-2018. Methodology- Time series data is analyzed by Autoregressive Distributed Lag (ARDL) method of cointegration. Findings-Stationarity of the variables are supported by Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests. F bounds test and error correction model suggest that variables are cointegrated. Conclusion- Empirical analysis does not support the evidence in favor of productivity bias hypothesis for Brazil over the selected period.

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.

Is There a Relationship between Productivity and Relative Prices in South Africa?

Abstract The Balassa–Samuelson hypothesis proposes that there should be a direct relationship between a country’s real exchange rate and its productivity performance. Given South Africa’s (SA’s) poor relative productivity performance, a weak and depreciating real exchange rate would be expected under this hypothesis. However, the real effective exchange rate has been relatively stable since the early 2000s. We construct tradable and nontradable price and productivity measures and show that tradable sectors have tended to experience more rapid productivity growth than nontradable sectors in both SA and the United States. However, we show that there is not a strong relationship between sectoral productivity and prices in SA, or with the real exchange rate with the United States. Better explanations for SA’s deteriorating international competitiveness (shown by higher relative prices) are a relatively high domestic inflation rate caused by nontradable sectors, as well as disproportionately large increases in government wages over the post–global financial crisis period.

The Determinants of Real Exchange Rates in Transition Economies

Real exchange rates in the transition region have been relatively volatile over the past two decades, with major variation across countries and over time. In most countries, there was a shift between the pre-global crisis period, when the region saw significant real appreciation of currencies, and the post-crisis period during which real exchange rates have been mostly stable or depreciating. In broad terms, real exchange rates have tended to move in line with GDP growth and productivity rates, albeit with important exceptions. Our empirical results show some support for the traditional Balassa-Samuelson hypothesis, according to which real appreciation is driven by productivity differentials in the traded goods sector. Other factors, including government consumption, terms of trade, and capital inflows, do not seem to be significant drivers of real exchange rate movements.

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.

발라사-사무엘슨 가설에 대한 연구 : 중국을 대상으로

본 연구는 발라사-사무엘슨 가설하에 중국의 상대노동생산성, 실질환율, 외환보유액 및 미국의 상대노동생산성 간의 관계를 분석하는 데 있다. 이를 위해 2000년부터 2016년까지 분기데이터를 이용하여 벡터오차수정모형(VECM)을 설정하여 추정하였다. 분석결과 중국의 경우 장기적으로 중국 상대노동생산성(서비스업 대비 제조업 생산성 비율)의 증가는 중국 위안화를 정상화시키는 것으로 분석되어 발라사-사무엘슨 가설이 성립하는 것으로 나타났다. 그리고 미국의 상대노동생산성 증가는 중국의 위안화를 절하시키고 중국 외환보유액 (준비자산)의 증가는 위안화를 절상시키는 것으로 분석되었다.

An empirical test of the Balassa-Samuelson hypothesis: Evidence from eight middle-income countries in Africa

The paper tests the validity of the Balassa-Samuelson hypothesis (BSH) using the within-effects and the dynamic panel generalised methods of moment (GMM) techniques for a panel of eight middle-income African countries over the period 1960–2009. We selected these countries because they exhibited a mixture of relative productivity growth and real exchange rate misalignment that fits the characterization of the BSH well. The results strongly support the BSH for this group of countries. The results are valid even after we controlled for potentially omitted variables and endogeneity. The implication is that as these countries become more productive, their currencies appreciate in real terms.

The Balassa–Samuelson hypothesis in the developed and developing countries revisited

This paper aims at examining the Balassa–Samuelson (BS) hypothesis in 20 developed and 20 developing countries, respectively. Given the cross-sectional dependence and structural breaks, we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and non-stationary factors. The empirical results show that the BS hypothesis holds in the developed countries, implying that higher productivity growth leads to a real appreciation, but they are cointegrated up to a number of cross-sectional unobserved stochastic trends as factors are non-stationary. However, we find little evidence to support the BS hypothesis in the developing countries and a further research is needed for the reason.

Technip to supply proprietary equipment for S-Oil's fluid catalytic cracking unit

This paper aims at examining the Balassa–Samuelson (BS) hypothesis in 20 developed and 20 developing countries, respectively. Given the cross-sectional dependence and structural breaks, we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and non-stationary factors. The empirical results show that the BS hypothesis holds in the developed countries, implying that higher productivity growth leads to a real appreciation, but they are cointegrated up to a number of cross-sectional unobserved stochastic trends as factors are non-stationary. However, we find little evidence to support the BS hypothesis in the developing countries and a further research is needed for the reason.

Global market for emission control catalysts to be worth over $16 bn by 2021

This paper aims at examining the Balassa–Samuelson (BS) hypothesis in 20 developed and 20 developing countries, respectively. Given the cross-sectional dependence and structural breaks, we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and non-stationary factors. The empirical results show that the BS hypothesis holds in the developed countries, implying that higher productivity growth leads to a real appreciation, but they are cointegrated up to a number of cross-sectional unobserved stochastic trends as factors are non-stationary. However, we find little evidence to support the BS hypothesis in the developing countries and a further research is needed for the reason.