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The Balassa-Samuelson effect in Romania - The role of regulated prices

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  • Dumitru, Ionut
  • Jianu, Ionela

Abstract

Due to the Balassa-Samuelson effect, the candidate countries to the European Monetary Union face a possible conflict between the effects of tradable productivity increase on inflation and on the appreciation of the real exchange rate on one hand, and the Maastricht criteria regarding inflation and exchange rate stability on the other hand. A restrictive monetary policy could succeed in reaching inflation criteria, but only with the cost of slowing down real convergence. This paper deals with the Balassa-Samuelson effect in Romania. The main conclusion of the paper is that in the period 1998-2006 the average annual rate of inflation generated by the Balassa-Samuelson effect in Romania was on average 0.6% in the case of the classical model. Due to the existence of government-regulated prices (mostly non-tradable goods) accounting for as much as 21% of the CPI basket in Romania - the price of non-tradables has increased by less than in the case those prices were market prices. If we include these regulated prices in non-tradable, which is named by us extended model, the impact of Balassa-Samuelson on inflation could have been on average 2.46%. Therefore, the Balassa-Samuelson effect is expected to result into higher inflation with future price liberalization for non-tradables.

Suggested Citation

  • Dumitru, Ionut & Jianu, Ionela, 2009. "The Balassa-Samuelson effect in Romania - The role of regulated prices," European Journal of Operational Research, Elsevier, vol. 194(3), pages 873-887, May.
    • Handle: RePEc:eee:ejores:v:194:y:2009:i:3:p:873-887
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    References listed on IDEAS

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    1. Alternative view of falling inflation in Romania
      by florincitu in FlorinCitu on 2011-11-11 17:38:00

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    Cited by:

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    3. Oscar Iván Ávila Montealegre & Mauricio Rodríguez Acosta & Hernando Zuleta González, 2014. "The Balassa-Samuelson Hypothesis and Elderly Migration," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 32(74), pages 1-8, June.
    4. repec:nup:jrmdke:v:2:y:2014:i:3:p:525-536 is not listed on IDEAS
    5. Nicolae Ghiba, 2011. "Purchasing Power Parity Influence On Real Exchange Rate Behavior In Romania," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3(4), pages 524-536, December.
    6. Lucian Claudiu ANGHEL & Laurentiu-Mihai TREAPAT, 2015. "Main Economic Policies in order to Manage an Optimum Accession of Romania to the Euro Zone," Management Dynamics in the Knowledge Economy, College of Management, National University of Political Studies and Public Administration, vol. 3(1), pages 151-169, March.
    7. Hongjun Peng & Tao Pang & Fuliang Cao & Juan Zhao, 2018. "A Mutual Subsidy Mechanism for a Seasonal Product Supply Chain Channel Under Double Price Regulation," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(06), pages 1-26, December.
    8. Echeverria Garaigorta, Paulina Elisa & Iza Padilla, María Amaya, 2010. "Prices and the Real Exchange Rate in Hong Kong: 1985-2006," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    9. Angelos Kanas & Angelos Kotios & Panagiotis D. Zervopoulos, 2019. "Semi-parametric real exchange rates dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 643-656, February.
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