Transcript Slide 1

Assessment of Balassa-Samuelson
Effect in Croatia
Gorana Lukinić, Igor Ljubaj and Josip Funda
Overview of the Presentation

Introduction

Theoretical Background

Data

Econometric Analysis

Conclusions
Theoretical Background

Balassa-Samuelson hypothesis - faster productivity growth
in the tradable sector in relation to the nontradable sector in a
given economy in comparison to foreign economies will lead
to higher growth of domestic prices of nontradables, higher
overall inflation and real appreciation of that country’s
currency;

Transmission mechanism - productivity growth in the
tradable sector will increase wages in that sector and, due to
labour mobility between sectors, wages in the nontradable
sector will also rise; producers of nontradables must raise the
prices of their products to be able to pay higher wages, which
in turn leads to an increase in the overall price level in the
economy.
Balassa-Samuelson Model

Domestic version
p NT  pT  aT  a NT

International version
p  p*  e  (1   )(aT  a NT )  (1   * )(a*T  a*NT )
q  (1   * )(a*T  a*NT )  (1   )(aT  a NT )
Empirical Literature on BalassaSamuelson Effect in Croatia

Mihaljek and Klau (2003)

productivity differential between tradable and nontradable sectors
contributed to price differential between nontradables and tradables
by 2.2 percentage points, and CPI inflation by 1.26 percentage
points,
 international Balassa-Samuelson effect is not statistically significant;

Egert (2005)


estimates of contribution of the Balassa-Samuelson effect to
average annual CPI inflation in Croatia go from 0 to 0.63
percentage points, depending on whether the estimates are based
on productivity data from national accounts or on industrial
production data;
Nestić (2004)

Balassa-Samuelson effect for Croatia is not directly evaluated, but
concludes that the higher price level in Croatia compared to other
transition countries can be partially explained by labour productivity
differentials in the tradable and nontradable sectors.
Data

productivity and price series for Croatia and the
Eurozone - from the first quarter of 1998 to the third
quarter of 2006;

the selection of the period is constrained by the
availability of officially published data;

the series were constructed as base indices with 1998
as the base year and seasonally adjusted using the X-12
ARIMA method;
Data (cont.)

productivity



prices



tradable sector – manufacturing, mining and querying (first set),
additionally hotels and restaurants (second set);
nontradable sector – residual (agriculture excluded)
tradables – goods prices index and weighted implicit deflator
index of specific branches;
nontradables – services prices index and weighted implicit
deflator index of specific branches;
real HRK/EUR exchange rate

nominal exchange rate multiplied by the ratio of foreign and
domestic prices (HICP, implicit deflators and PPI).
Labour Productivity in Croatia, 1998=100
155
145
135
125
115
105
LPT1
Sources: CBS, authors' calculations
LPNT1
LPT2
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95
LPNT2
Labour Productivity and Real Wages in
Tradable Sector in Croatia, 1998=100
155
145
135
125
115
105
LPT
LPT2
Sources: CBS, authors' calculations
RWT_PPI
RWT_CPIG
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95
RWT_DEFT
Nominal Wages in Croatia, 1998=100
170
160
150
140
130
120
110
100
WT1
WNT1
Sources: CBS, authors' calculations
WT2
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90
WNT2
Prices of Tradables and Nontradables in
Croatia, 1998=100
CPI_G
Sources: CBS, authors' calculations
CPI_S
DEFT
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160
150
140
130
120
110
100
90
DEFNT
Relative Productivity in Croatia and the
Eurozone, 1998=100
130
125
120
115
110
105
100
LPT_EA/LPNT_EA
Sources: CBS, Eurostat, authors' calculations
LPT1/LPNT1
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95
LPT2/LPNT2
Inflation in Croatia and the Eurozone,
1998=100
CPI
Sources: CBS, Eurostat
DEF
HICP_EA
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140
135
130
125
120
115
110
105
100
95
DEF_EA
Real Exchange Rate (1998=100)
110
105
100
95
90
RER_CPI
Sources: CBS, Eurostat, CNB, authors' calculations
RER_DEF
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85
RER_PPI
Econometric Analysis
“It’s my experience that “economy-tricks” is usually nothing
more than a justification of what the author believed
before the research was begun.”
Estimated Coefficients and Accompanying tstatistics for Domestic Balassa-Samuelson Effect
CPI NT
Dependent var.:  log(
)t
CPI T
Independent variables
Equation (20)
Equation (21)
C
***0.0067
(2.9579)
0.0036
(1.6406)
0.0081
(0.0652)
0.0065
(0.0615)
 log(
LPT
NT
)t
LP
CPI NT
 log(
) t 1
CPI T
N
R2
34
*0.2964
(1.9945)
33
0.0001
0.1208
-
***, **, * indicates rejection of the null hypothesis at significance levels of 1%, 5% and 10%.
LPT
CPI NT
 log(
) t  c   0  log( NT ) t   i
CPI T
LP
LPT
CPI NT
CPI NT
 log(
)

c




log(
)



log(
) t 1   i
t
0
t
1
CPI T
LP NT
CPI T
Estimated Coefficients and Accompanying tstatistics for International Balassa-Samuelson
Effect
Dependent variable:
Dependent variable:
 log RERt
Independent variables
C
prod _ dif
 log Et
 log(
CPI
) t 1
CPI EA
N
R2
 log(
CPI
)t
CPI EA
Equation (22)
-0.006
(-0.3396)
Equation (23)
***0.0026
(3.4549)
Equation (24)
*0.0014
(1.7714)
-0.2232
(-0.5801)
0.1744
(1.10425)
0.2048
(2.6998)
-
0.0280
(0.3572)
-0.0572
(-0.7497)
-
-
**0.4378
(2.6998)
34
0.0104
34
0.0476
33
0.2298
***, **, * indicates rejection of the null hypothesis at significance levels of 1%, 5% and 10%.
 log RERt  c  0 prod _ dift   i
 log(
CPI
) t  c   0 prod _ dif t  1 log Et   i
CPI EA
 log(
CPI
CPI
)  c   0 prod _ dif t  1 log Et   2  log(
)t 1   i
EA t
CPI
CPI EA
Conclusion

presence of the BS effect in Croatia is obviously less
marked than in similar countries;

its influence on inflation and real exchange rates should
not constitute a barrier to meeting convergence criteria;

possible other econometric techniques for estimating BS
effect.