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Real currency appreciation in accession countries: Balassa-Samuelson and investment demand

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  • Fischer, Christoph

Abstract

The Balassa-Samuelson effect is usually seen as the prime explanation of the continuous real appreciation of central and east European (CEE) transition countries' currencies against their western counterparts. The response of a small country's real exchange rate to various shocks is derived in a simple model. It is shown that productivity shocks work not only through a Balassa-type supply channel but also through an investment demand channel. Therefore, empirical evidence apparently in favour of Balassa-Samuelson effects may require a re-interpretation. The model is estimated for a panel of CEE countries. The results are consistent with the model, plausibly explain the observed real appreciation and support the existence of the proposed investment demand channel.

Suggested Citation

  • Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Discussion Paper Series 1: Economic Studies 2002,19, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:4184
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    More about this item

    Keywords

    real exchange rate; Balassa-Samuelson effect; transition economies; panel;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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