Beyond Balassa–Samuelson: Real appreciation in tradables in transition countries¹

Abstract

We decompose real appreciation in tradables derived from producer price indexes in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (the substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for commodity like goods.JEL classifications: F12, F15.

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues

“…This is supported by Cincibuch and Podpiera (2004) who show that sectoral real exchange rates in manufacturing industries experienced strong appreciation from 1997-2004. Clearly, the traditional B-S effect cannot explain the appreciation of the real exchange rate deflated by the PPI (as a proxy for tradable prices) because its impact passes through the non-tradable price channel.…”

“…However, it should be borne in mind that such models cannot produce a trend appreciation of the tradable price-deflated real exchange rate such as has been observed for the CEE economies. Furthermore, Cincibuch and Podpiera (2004) find for three CEE economies that pricing-to-market explains only medium term fluctuations but not the trend appreciation. Égert, Lahrèche-Révil and Lommatzsch (2004) show that productivity increases in the open sector yields a depreciation of the real exchange rate in small open OECD countries, but tend to lead to an appreciation of the open sector's real exchange rate in transition countries and in a group of emerging market economies.…”

The Balassa-Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained

“…Given 11 . Table 1 shows the results from this test for both groups of countries, taking into account the possible existence of a trend in the long run relationship.…”

The dynamics of economic convergence: The role of alternative investment decisions

“…The average annual effect is 0.7 percent, which is roughly one third of the observed average close to 3 percent annual real exchange rate appreciation in the region during 1995-2005. 3 An increase in product quality enables to export products at higher prices, which is compatible with the structural (equilibrium) real exchange rate appreciation. Hallak and Schott (2008), Cincibuch andPodpiera (2006), andFabrizio et al (2007) document an average 4 percent annual increase in relative product quality in the CEE countries compared to various benchmarks during 1989-2004. This is consistent with the increasing proportion of high-tech production in export of Visegrad-4; approx.…”