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
Date Written: 2004
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: Suggested Citation