Samuelson Hypothesis Research Articles

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.

Theory of storage implications in the European natural gas market

The theory of storage stands that futures prices should be equal to the spot price plus the interest forgone in storing the commodity and the warehousing costs minus the convenience yield on the inventory. In this paper, we test several implications of the theory of storage on the pricing of United Kingdom natural gas futures. We obtain partial evidence for the theory of storage as a complete explanation of the pricing of this futures contract. Explicitly, (i) we obtain evidence to explain convenience yield seasonality with spot price volatility, unexpected demand shocks when supply is tight, inventory variations, and trading activity in the futures markets; (ii) we obtain indirect evidence for the theory of storage in accepting the Samuelson hypothesis; (iii) weak although significant influence of storage levels in determining the basis is obtained; (iv) we find weak evidence for the inventory influence of futures volatility; and (v) finally, the slope of the convenience yield structure is found to respond to inventory changes and trading activity in the futures markets that anticipates inventory scarcity. All in all, we can conclude that our evidence for the theory of storage in this market is strong but cannot completely explain futures pricing for natural gas.

Samuelson hypothesis and carry arbitrage: U.S. and China

A comparative study between the U. S. and Chinese futures markets focusing on the Samuelson hypothesis of the maturity effect was conducted. We examine 15 matched pairs of futures markets between October 31, 2015 and October 31, 2021 and provide empirical evidence of carry arbitrage in only a few U. S. futures markets but no Chinese futures markets. We posit that structural factors drive the empirical differences identified here. The results improve our understanding of futures price volatility differences between markets and provide evidence of the role financing plays in existing and emerging futures markets.

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.

The minimal-time growth problem and ‘very strong’ turnpike theorem

This paper refers to the author's previous work, in which the ‘weak’ turnpike theorem in the stationary Gale economy was proved. This theorem states that each optimal growth process {y*(t)}t*1t=0 that leads the economy in the shortest possible time t*1 from the (initial) state of y0 to the set of target/postulated states Y1 almost always runs in the neighbourhood of the production turnpike, where the economy remains in a specific dynamic equilibrium (peak growth equilibrium). This paper presents a proof of the ‘very strong’ turnpike theorem in the stationary Gale economy, which states that if the optimal process (the solution to the minimaltime growth problem) reaches a turnpike in a certain period of time tˇ < t*1 - 1, then it stays on it everywhere else, except for, at most, final period t*1. The obtained result confirms the wellknown Samuelson hypothesis about the specific turnpike stability of optimal growth paths in multiproduct/multisectoral von Neumann-Leontief-Gale-type models, also in the case where the growth criterion is not the (normally assumed) utility of production but the time needed by the economy to achieve the postulated target level or volume of production.

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.

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.

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.

Samuelson hypothesis, arbitrage activity, and futures term premiums

AbstractThe Samuelson hypothesis asserts that futures volatility increases as maturity decreases. On the basis of 10 US commodity futures and by capturing the dynamics of the futures volatility terms structure with three factors, we show that in most markets the slope factor is strongly negative in certain periods and at best only weakly negative in other periods. High inventory levels are found to correspond to flatter volatility term structures in seven futures. This finding is consistent with the linkage between carry arbitrage and the Samuelson hypothesis. We also find that a flatter volatility term structure corresponds to lower absolute futures term premiums.

Revisiting the Samuelson hypothesis on energy futures

We investigate two issues in this article. First, this study employs almost stochastic dominance and the power spectrum to investigate the maturity effect, a hypothesis proposed by Samuelson (1965. Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 1965, 6(2), 41–49; 1976. Is real-world price a tale told by the idiot of chance? The Review of Economics and Statistics, 1976, 58(1), 120–123) in the stochastic variance framework. Second, we also reevaluate the argument in Bessembinder et al. (1996. Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis. Journal of Derivatives, 1996, 4(2), 45–58) that spot price seasonality plays a role in explaining this hypothesis. We include five types of energy futures for empirical examination. The outcomes provide evidence ranging from supporting, to being contrary to the hypothesis. For empirical analysis, we also highlight that the periodic pattern of the futures return series explains the difference in outcomes. Those in the spot price, futures price, or spot return series do not contribute to these outcomes.

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.

Samuelson Hypothesis of the Maturity Effect and Carry Arbitrage: U. S. and China

A comparative study is conducted between U. S. and Chinese futures markets with a particular focus on the Samuelson hypothesis of the maturity effect. We examine 44 futures markets in the U.S. and 43 futures markets in China between April 1, 1987 and June 1, 2018. Here we examine 16 matched pairs and results for all 87 contracts are reported in an online appendix. Empirical evidence is provided of carry arbitrage activities in only a few U. S. futures markets but no Chinese futures markets. An effort is made to identify the salient structural factors driving the empirical differences identified here. The results are important as an improved understanding of these differences in futures price volatility provides numerous benefits to a host of constituencies.

The volatility of returns from commodity futures: evidence from India

BackgroundThis paper examines the pattern of the volatility of the daily return of select commodity futures in India and explores the extent to which the select commodity futures satisfy the Samuelson hypothesis.MethodsOne commodity future from each group of futures is chosen for the analysis. The select commodities are potato, gold, crude oil, and mentha oil. The data are collected from MCX India over the period 2004–2012. This study uses several econometric techniques for the analysis. The GARCH model is introduced for examining the volatility of commodity futures. One of the key contributions of the paper is the use of the β term of the GARCH model to address the Samuelson hypothesis.ResultThe Samuelson hypothesis, when tested by daily returns and using standard deviation as a crude measure of volatility, is supported for gold futures only, as per the value of β (the GARCH effect). The values of the rolling standard deviation, used as a measure of the trend in the volatility of daily returns, exhibits a decreasing volatility trend for potato futures and an increasing volatility trend for gold futures in all contract cycles. The result of the GARCH (1,1) model suggests the presence of persistent volatility and the prevalence of long memory for the select commodity futures, except potato futures.ConclusionsThe study sheds light on significant characteristics of the daily return volatility of the commodity futures under analysis. The results suggest the existence of a developed market for the gold and crude oil futures (with volatility clustering) and show that the maturity effect is only valid for the gold futures.

Volatility, maturity and volume in the Indian metals futures

ABSTRACTThis study examines the validity of Samuelson hypothesis and the mixture of distribution hypothesis to uncover time-to-maturity and trading volume as the sources of volatility in gold and copper futures. Exponential generalized autoregressive conditional heteroskedasticity model is used for empirical analysis. Leverage effect is found in copper futures but not in gold futures. We find evidence of the Samuelson maturity effect even after controlling for the trading volume. The mixture of distribution hypothesis is strongly supported. Hence trading volume, a proxy for information arrival, is one of the important determinants of volatility, and it dominates time-to-maturity. The results have implications for setting the desired level of margin requirements in futures contracts, designing effective hedging strategy and strengthening the risk management practices.

Real Exchange Rates Determination: Purchasing Power Parity (PPP), and Balassa-

The Balassa and Samuelson hypothesis -- BS -- (Balassa, 1964, Samuelson, 1964), which natural point of departure is the Salter-Swan (dependent economy) model is analysed. It offers general theoretical justification of the long-run trends in real exchange rates in relation to productivities and prices. This is to say, that taking into consideration the important real world feature of having both tradable and non-tradable goods BS states that if a given country’s productivity in producing tradable goods compared to its productivity in making non-tradable goods and services rises more rapidly than in a (certain) foreign country, then the home country real exchange rate will experience appreciation. Thus if productivity of factors of production grows faster in the home country tradable sector, then relative price in the non-tradable sector should rise. Furthermore, we provide supporting illustrative evidence by empirically assessing the BS effect for Azerbaijan.

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.

A re-examination of maturity effect of energy futures price from the perspective of stochastic volatility

This paper selects stochastic volatility (SV) as the uncertainty or volatility measure to re-examine the Samuelson hypothesis of maturity effect (SHME) (Samuelson, 1965). Stochastic dominance is used to examine whether the stochastic volatility level dominates with respect to maturity. The empirical analyses of energy-futures price series generally provide mild support for this hypothesis in terms of the first two degrees of stochastic dominance. Each type of futures has its own properties with respect to the maturity effect. SV levels play a role in determining the testing outcome. The hypothesis is more likely to hold at low SV levels. The higher the volatility level, the less likely the SHME will hold because SV surges to its peak level regardless of maturity.

Lost in intervention. The Harrod–Balassa–Samuelson effect on the peseta/dollar real exchange rate (1870–1998)

ABSTRACTWe have decomposed the peseta/dollar real exchange rate (1870–1998) into its trend and cyclical components and used the former to proxy its time-varying equilibrium. Then, we have compared changes in the equilibrium with changes in the Spanish and the USA productivity differentials to identify years that do not fit with the Harrod–Balassa–Samuelson (HBS) hypothesis. The greatest maladjustment is found in the 1940s and 1950s, decades of strong exchange rate intervention in Spain. Conversely, the link between equilibrium and differentials adjusts to the hypothesis when using the non-intervened peseta/dollar exchange rate on the Tangier black market. These contrasting results back up the idea that exchange rate intervention, so common in developing countries, might explain their scanter evidence in favour of the HBS effect.