Real Exchange Rates Determination: Purchasing Power Parity (PPP), and Balassa-Samuelson Hypothesis
DOI:
https://doi.org/10.15549/jeecar.v4i1.147Keywords:
Central Asia, economic developmentAbstract
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.
References
Balassa, B., (1964). The Purchasing Power Parity Doctrine: A Reappraisal, Journal of Political Economy, vol. 72, December, pp. 584-596
Beirne, J., Bijsterbosch, M. (2009). Exchange rate pass-through in central and eastern European
member states. Working Paper European Central Bank 1120, Euro System.
Bordo, M., Eh. Choudhri, G., Fazio, and R., MacDonald, (2014). The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered, NBER Working Papers, Working Paper 20228, http://www.nber.org/papers/w20228
Cassel, G., (1918). Abnormal deviations in international exchanges, The Economic Journal, vol. 28, pp. 413-415.
Corsetti, G., Ph., Martin, and P. Pesenti, (2005). Productivity Spillovers, Terms of Trade, and the Home Market Effect, Federal Reserve Bank of New York Staff Reports, no. 201,February 2005
Gadea, M., and L. Mayoral, (2013). Uncertainty, model selection and the PPP puzzle, Working Paper, University of Zaragoza, October 2013
Kakkar V., and I. Yan, (2014). Determinants of real exchange rates: An empirical investigation BOFIT Discussion Papers, Bank of Finland, BOFIT, Institute for Economies in Transition, 1, 2014
Leon, J. and Soto, R. (1997), Structural Breaks and Long-Run Trends in Commodity Prices. Journal of International Development, 9: 347
Lopez, C., Ch., Murray, and D., Papell, (2011). Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle, Applied Economics, 45, 455-464
Nahuis, N., and B. Geurts, (2004). Helping thy neighbour: productivity, welfare and international trade , General Financial and Economic Policy Directorate, Ministry of Finance, The Netherlands
Obstfelt, M., and K. Rogoff, (1996). Foundations of International Macroeconomics, The MIT Press, Cambridge Massachusetts, London England
Pesaran, M. H. and Y. Shin, (1995). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis, DAE Working Paper No.9514, Department of Applied Economics, University of Cambridge.
Pesaran, M. H., Y. Shin and R. J. Smith, (1996). Testing for the Existence of Long-Run Relationship, DAE Working Paper No. 9622, Department of Applied Economics, University of Cambridge.
Pesaran, M. H., Y. Shin and R. J. Smith (2001). Bounds testing approaches to the analysis of level relationships, Journal of Applied Econometrics, special issue in honour of
J. D. Sargan on the theme "Studies in Empirical Macroeconometrics", D.F. Hendry and M.H. Pesaran (eds),Vol.16,pp.289–326.
Rogoff, K, (1996). The Purchasing Power Parity Puzzle, Journal of Economic Literature, Vol. 34, No. 2., June, 1996, pp. 647- 668.
Samuelson, P., (1964). Theoretical Notes on Trade Problems, Review of Economics and Statistics, vol. 23, pp.: 1-60.
Downloads
Published
How to Cite
Issue
Section
License
The JEECAR journal allows the author(s) to hold the copyright and publishing rights of their own manuscript without restrictions.
This journal applies the Creative Attribution Common License to works we publish, and allows reuse and remixing of its content, in accordance with a CC-BY 4.0 license.
Authors are free to: Share — copy and redistribute the material in any medium or format and Adapt — remix, transform, and build upon the material for any purpose, even commercially.
Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
No additional restrictions — The author may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.
The JEECAR Journal is committed to the editorial principles of all aspects of publication ethics and publication malpractice as assigned by the Committee on Public Ethics.