Nominal and Real Convergence in Estonia: The Balassa-Samuelson (Dis)Connection. Tradable Goods, Regulated Prices and Other Culprits

66 Pages Posted: 11 Jun 2003

See all articles by Balázs Égert

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

Date Written: 2003

Abstract

The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long run. Furthermore, the role of regulated prices in the CPI basket is also investigated - we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2-3% over the sample period, and more specifically 1-4% at the beginning of the period and 0.5-1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1-2%. Analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK, shows that, whereas the inflation differential attributable to the B-S effect seems to have been higher in the early 1990s, it better explains the real appreciation occurring in recent years.

Keywords: Convergence, Transition, Balassa-Samuelson Effect, Productivity, Relative Prices, Tradable Goods, Regulated Prices, Real Exchange Rate

JEL Classification: E31, F31, O11, P17

Suggested Citation

Egert, Balazs, Nominal and Real Convergence in Estonia: The Balassa-Samuelson (Dis)Connection. Tradable Goods, Regulated Prices and Other Culprits (2003). Available at SSRN: https://ssrn.com/abstract=392261 or http://dx.doi.org/10.2139/ssrn.392261

Balazs Egert (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

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Paris Cedex 16, 75775
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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