Catching-Up and Inflation in Transition Economies: The Balassa-Samuelson Effect Revisited

Abstract

This paper estimates the Balassa-Samuelson effects for 11 countries in central and eastern Europe on a disaggregated set of quarterly data covering the period from the mid-1990s to the first quarter of 2008. The Balassa-Samuelson effects are clearly present and explain around 24% of inflation differentials vis-à-vis the euro area (about 1.2 percentage points on average); and around 84% of domestic relative price differentials between non-tradables and tradables; or about 16% of total domestic inflation (about 1.1 percentage points on average). The paper presents mixed evidence on whether the Balassa-Samuelson effects have declined since 2001 compared with the second half of the 1990s.

Determinants of Government Bond Spreads in New EU Countries

“…Among the permanent factors, productivity, per capita income and foreign capital inflows play an important role whereas fiscal shocks are mainly seen as transitory in driving the exchange rate dynamics. As showed in the literature on inflation determinants in the Central European Countries (see for instance Mihaljek and Klau, 2008), more structural factors, in particular the Balassa-Samuelson effect-rather than financial ones-seem to drive inflation rates in these economies.. As a consequence, whenever, the rise in inflation is perceived by investors as having a structural rather than transitory source, higher inflation may well coexist with lower long-term interest rate differentials.…”

Inflation Differentials across Regions in Turkey

“…In other words, it implies that the intensity of trade linkages across regions hamper arbitrage-driven profit possibilities and enhance price equilibration (Yılmazkuday 2013). However, there are some crucial distinctions between the BalassaSamuelson effect and the Baumol-Bowen effect and these arguments are examined in several papers (Mihaljek and Klau 2004;2008). The main distinction regards the fact that in the services sector productivity growth is likely to be slower than in the capital-intensive goods sector.…”

Eurozone entry criteria after the crisis

“…16 Though the measure is by construction based on past policy responses, changes in fiscal responses will over time feed into a re-estimated threshold, the adjustment can be further augmented by attaching greater weight to recent fiscal responses in the estimation. 17 For recent assessments of the HBS effect, see Égert (2007) and Mihaljek and Klau (2008). 18 See e.g.…”