Real Currency Appreciation in Accession Countries: Balassa-Samuelson and Investment Demand

Review of World Economics, Vol. 140, No. 2, pp. 179-210, 2004

Posted: 3 Mar 2003 Last revised: 7 Mar 2012

Multiple version iconThere are 2 versions of this paper

Date Written: 2004

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.

Keywords: real exchange rate, Balassa-Samuelson effect, transition economies, panel

JEL Classification: F31, F41, C33

Suggested Citation

Fischer, Christoph A., Real Currency Appreciation in Accession Countries: Balassa-Samuelson and Investment Demand (2004). Review of World Economics, Vol. 140, No. 2, pp. 179-210, 2004, Available at SSRN: https://ssrn.com/abstract=348340 or http://dx.doi.org/10.2139/ssrn.348340

Christoph A. Fischer (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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