Abstract
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.References
Alberola-Ila, E., & Tyrväinen, T. (1998). Is there scope for inflation differentials in EMU? An empirical evaluation of the Balassa-Samuelson Model in EMU countries. Bank of Spain Working Paper, No.9823. [Retrieved from].
Balassa, B. (1964). The purchasing power parity doctrine: A reappraisal. Journal of Political Economy, 72(6), 584-596. doi. 10.1086/258965
Berka, M., Devereux, M.B., & Engel, C. (2018). Real exchange rates and sectoral productivity in the Eurozone. American Economic Review, 108(6), 1543-1581. doi. 10.1257/aer.20151045
Bordo, M.D., Choudhri, E.U., Fazio, G., & MacDonald, R. (2017). The real exchange rate in the long run: Balassa-Samuelson effects reconsidered. Journal of International Money and Finance, 75, 69-92. doi. 10.1016/j.jimonfin.2017.03.011
Calderón, C. & Schmidt-Hebbel, K. (2003). Macroeconomic policies and performance in Latin America. Journal of International Money and Finance, 22(7), 895-923. doi. 10.1016/j.jimonfin.2003.09.005
Canzoneri, M.B., Cumby, R., & Diba, B. (1999). Relative labor productivity and the real exchange rate in the long run: Evidence for a panel of OECD countries. Journal of International Economics. 47(2), 245-266. doi. 10.1016/S0022-1996(98)00021-X
Caputo, R. (2018). Real exchange rate appreciation after the financial crisis of 2008-2009: Misalignment or fundamental correction? International Finance, 21(3), 253-272. doi. 10.1111/infi.12133
Chinn, Menzie & Louis Johnston. (1999). The impact of productivity differentials on real exchange rates: Beyond the Balassa-Samuelson framework. Santa Cruz: Dept. of Economics, University of California, Working Paper, No.442.
Choudhri, E., & Khani, M. (2005). Real exchange rates in developing countries: Are Balassa-Samuelson effects present? IMF Economic Review, 52, 387-407. https://doi.org/10.2307/30035969
Choudhri, E.U., & Schembri, L.L. (2010). Productivity, the terms of trade, and the real exchange rate: Balassa-Samuelson hypothesis revisited, Review of International Economics, 18(5), 924-936. doi. 10.1111/j.1467-9396.2010.00917.x
Costa, A., Garcia, J., Raymond, J.L., & Sanchez-Serra, D. (2019). Subnational purchasing power of parity in OECD countries: Estimates based on the Balassa-Samuelson hypothesis. OECD Regional Development Working Papers, No.2019/12. https://doi.org/10.1787/3d8f5f51-en
Comunale, M. (2017). Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in EU. Journal of International Money and Finance, 73(B), 350-370. doi. 10.1016/j.jimonfin.2017.02.012
Comunale, M. (2015). Long-run determinants and misalignments of the real effective exchange rate in the EU. SSRN Electronic Journal. doi. 10.2139/ssrn.2595037
Couharde, C., Delatte, A.-L., Grekou, C., Mignon, V., & Morvillier, F. (2020). Measuring the Balassa-Samuelson effect: A guidance note on the RPROD database. International Economics, 161, 237-247. doi. 10.1016/j.inteco.2019.11.010
Drine, I. & Rault, C. (2003). Do panel data permit to rescue the Balassa-Samuelson Hypothesis for Latin American countries? Applied Economics, 35(3), 351-361. doi. 10.1080/0003684022000015838
Dumrongrittikul, T., & Anderson, H.M. (2016). How do shocks to domestic factors affect real exchange rates of Asian developing countries? Journal of Development Economics, 119, 67-85. doi. 10.1016/j.jdeveco.2015.10.004
Edwards, S., & Levy-Yeyati, E. (2005). Flexible exchange rates as shocks absorbers. European Economic Review. 49(8), 2079-2105. doi. 10.1016/j.euroecorev.2004.07.002
Egert, B. (2002a). Estimating the impact of the Balassa-Samuelson effect on the inflation and the real exchange rate during the transition. Economic Systems, 2681), 1-16. doi. 10.1016/S0939-3625(02)00002-X
Egert, B. (2002b). Investigating the Balassa-Samuelson Hypothesis in the transition: Do we understand what we see? A panel study. Economics of Transition, 10(2), 257-324. doi. 10.1111/1468-0351.00112
Egert, B., Drine, I., Lommatzsch, K. & Rault, C. (2002). Equilibrium exchange rates in transition economics: Taking stock of the issues. Review of Economic Surveys, 2082), 257-324. doi. 10.1111/j.0950-0804.2006.00281.x
Fazio, G., McAdam, P., & MacDonald, R. (2007). Disaggregate read exchange rate behavior. Open Economies Review, 18(4), 389-404. doi. 10.1007/s11079-007-9055-3
Garcia-Solanes, J., Sancho, F.I., & Torrejon, F. (2008). Beyond the Balassa-Samuelson effect in some new member states of the European Union. Economic Systems, 32(1), 17-32. doi. 10.1016/j.ecosys.2007.09.002
Garcia-Solanes, J. & Torrejon, F. (2007). The macroeconomics effects of inflation targeting in a group of Latin American countries. Universidad de Murcia, Working Paper, No.June/2007.
Garcia-Solanes, J. & Fernando Torrejon-Flores, (2009). The Balassa-Samuelson Hypothesis in developed countries and emerging market economies: Different outcomes explained, Economics, 3(2), 1-26.
Griffoli., T.M., Meyer, C., Natal, J.M., & Zanetti, A. (2015). Determinants of the Swiss Franc real exchange rate. Swiss Journal of Economics and Statistics, 151(4), 299-331. doi. 10.1007/BF03399419
Gubler, M., & Sax, C. (2019). The Balassa-Samuelson effect reversed: new evidence from OECD countries. Swiss Journal of Economics Statistics, 155(3). doi. 10.1186/s41937-019-0029-3
Halpern, L. & Wyplosz, C. (2001). Economic transformation and real exchange rates in the 2000s. The Balassa-Samuelson connection. UNO Economic Survey of Europe, 1, 227-239.
Heston, A., Nuxoll, D.A., & Summers, R. (1994). The differential productivity hypothesis and purchasing power parities: Some new evidence. Review of International Economics, 2(3), 227–243. doi. 10.1111/j.1467-9396.1994.tb00042.x
Hsieh, D.A. (1982). The determination of the real exchange rate: The productivity approach, Journal of International Economics, 12(3-4), 355-362. doi. 10.1016/0022-1996(82)90045-9
Ito, T., Isard, P., & Symansky, S. (1997). Economic growth and the real exchange rate: An overview of the Balassa-Samuelson Hypothesis in Asia, NBER Working Paper, No.5979. doi. 10.3386/w5979
Kovacs, M.A. (2002). On the estimated size of the Balassa-Samuelson effect in five Central and Eastern European countries. National Bank of Hungary, Working Paper, No.5. [Retrieved from].
MacDonald, R., & Ricci, L.A. (2001). PPP and the Balassa Samuelson effect: The role of the distribution sector, IMF Working Papers, No.01/38.
Marston, R.C. (1987). Real exchange rates and productivity growth in the United States and Japan. In S.W. Arndt & J.D. Richardson (Eds.), Real Financial Linkages Among Open Economies, (pp.71-96), Cambridge (Mass.): MIT Press.
Ricci, L.A., Milesi-Ferretti, G.M., & Lee, J. (2013). Real exchange rates and fundamentals: A Cross-Country Perspective. Journal of Money, Credit and Banking, 45(5), 845-865. doi. 10.1111/jmcb.12027
Samuelson, P.A., (1964). Theoretical notes on trade problems. Review of Economics and Statistics. 46(2), 147-154. doi. 10.2307/1928178
Tica, J., & Družić, I. (2020). The Harrod-Balassa-Samuelson effect: A survey of empirical evidence. University of Zagreb, Faculty of Economics and Business. Working Paper Series, No. 06-7/686.
Tintin, C. (2009).Testing the Balassa-Samuelson Hypothesis: Evidence from 10 OECD Countries. Master’s Thesis, Department of Economics, Lund University. [Retrieved from].
Zayed, N.M. (2018). Testing Balassa-Samuelson model to examine purchasing power parity of Bangladesh with reference to 1972-2016. Academy of Accounting and Financial Studies Journal, 22(1).