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The Balassa–Samuelson hypothesis in the developed and developing countries revisited

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  • Wang, Weiguo
  • Xue, Jing
  • Du, Chonghua

Abstract

This paper aims at examining the Balassa–Samuelson (BS) hypothesis in 20 developed and 20 developing countries, respectively. Given the cross-sectional dependence and structural breaks, we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and non-stationary factors. The empirical results show that the BS hypothesis holds in the developed countries, implying that higher productivity growth leads to a real appreciation, but they are cointegrated up to a number of cross-sectional unobserved stochastic trends as factors are non-stationary. However, we find little evidence to support the BS hypothesis in the developing countries and a further research is needed for the reason.

Suggested Citation

  • Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.
    • Handle: RePEc:eee:ecolet:v:146:y:2016:i:c:p:33-38
    DOI: 10.1016/j.econlet.2016.07.020
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    More about this item

    Keywords

    Balassa–Samuelson hypothesis; Real exchange rates; Productivity; Panel cointegration; Cross-sectional dependence; Structural breaks;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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