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FIW

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... layers, which in the following is referred to as reallocation and restructuring. ... the size of the tradable sector and its productivity measures - reallocation ... – PowerPoint PPT presentation

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Title: FIW


1
FIW Forschungskonferenz International
Economics Wirtschaftsuniversität Wien 11. 12.
2009
  • Balassa-Samuelson Still havent found what were
  • looking for?
  • Trond-Arne Borgersen and Roswitha M. King
  • Østfold University College, Halden, Norway

2
Balassa-Samuelson (B-S) effect empirically weak
  • Mihaljek and Klau (2008,2004) B-S explains
    around 16 of overall CPI
    inflation in selected east European
    countries.
  • B-S explains on average between 0.2
    and 2 of annual inflation differentials
    between east European countries and the
    euro area.
  • Also small effects reported by
  • Egert (2005), Egert (2002a), Egert (2002b),
  • Egert et al (2003)

  • Policy
    Relevance
  • Breuss (2003)
  • Cipriano (2001)
  • Coricelli Jazbec (2001)
  • Flek et al (2002)
  • Kovacs (2002)

3
Official stance of the European Commission and ECB
  • notwithstanding its importance, the
    Balassa-Samuelson effect should not be overstated
    when explaining current inflation rates in the
    accession countries. The Maastricht inflation
    criterion. will not be revised to take into
    account any possible Balassa-Samuelson effect
  • (Christian Noyer, 2001)

4
Why have we not found what we are looking for?
  • Is there nothing to find?
  • or
  • Have we been looking in the wrong places?

5
Three limiting (theory-based) features of B-S
  • First, mixing of supply-side and demand-side
    channels ( structural inflation relates to the
    supply side so analysis should be anchored there)
  • Second, B-S treats as independent what may be
    considered strongly related elements the
    productivity growth differential between sectors
    and the sectors relative magnitude.
  • Third, structural changes evolve over the longer
    term. However, by construction, B-S has
    relatively short-term orientation.

6
First, mixing of supply-side and
demand-side channels (B-S is about structural
inflation and that relates to the supply side)
  • Typically B-S computes sectoral shares in CPI
    rather than in GDP.
  • Mihaljek and Klau (2008) market based
    non-tradables account for only 20-30 in the
    Baltic States CPI basket, while accounting for
    more than 60 of value added in GDP.
  • using GDP based
    measures increases B-S and anchors it
    firmly on the supply side
  • where
    structural shifts reside

7
Second, B-S treats as independent what in
reality are strongly related elements the
productivity growth differential between sectors
and the sectors relative magnitude.
  • B-S uses two key elements
  • Relative sector size
  • Productivity growth differences between sectors
  • But does not exploit relations between them.
  • Our alternative approach
  • Defining a functional
    relation between
  • them.

8
Endogenizing the sector size function of
productivity growth difference
9
How productivity growth affects structural
inflation Productivity Growth Pass-Through
(sector size exogenous/endogenous)
10
Third, structural changes evolve over the longer
term. However, by construction, B-S has
relatively short-term orientation.
  • Long-run supply side transition dynamics come in
    two layers, which in the following is referred to
    as reallocation and restructuring .
  • Claim Conventional B-S effect captures the
    former, but not the latter.

11
The relationship between the size of the tradable
sector and its productivity measures -
reallocation
12
Long-term transition, the size of the tradable
sector and tradable sector productivity -
restructuring
13
The Scandinavian Model of Inflation Expressions
for Inflation and Structural Inflation
14
From the literature 2 variants of defining
structural inflation
  • When following the B-S effect over a number of
    years the literature provides two variants
  • Constant relative size of the non-tradable
    sector and time-indexed productivity growth
    differentials
  • (1-a)
  • alternatively, time-indexed productivity growth
    differentials and time-indexed relative sizes
    of the non-tradable sector
  • Both expressions are interpreted as structural
    inflation over a period of time

15
Our definition of (cumulative) structural
inflation
16
(1-a)t( )t (1-a)t( ) t1 (1-a)t( ) t2 . . (1-a)t( ) T-1 (1-a)t( ) T
(1- a)t1( )t (1-a)t1( )t1 (1-a)t1( )t2 . . (1-a)t1( )T-1 (1-a)t1( )T
(1- a)t2( )t (1-a)t2( )t1 (1-a)t2( )t2 . . (1-a)t2( )T-1 (1-a)t2( )T
(1- a)t3( )t (1-a)t3( )t1 (1-a)t3( )t2 . . (1-a)t3( )T-1 (1-a)t3( )T
. . . . . . . . . . . . . . . . . .
(1- a)T-1( )t (1-a)T-1( )t1 (1-a)T-1( )t2 (1-a)T-1( )T-1 (1-a)T-1( )T
(1- a)T( )t (1-a)T( )t1 (1-a)T( )t2 (1-a)T( )T-1 (1-a)T( )T
17
Sector size elasticity with respect to
productivity growth. Conditions for when
increased productivity differential translates
into structural inflation depends on the relation
between sector size elasticity and the
prevailing distribution of value added between
secors.
18
Each of the curves represents a given
relationship between value added in the tradable
and the non-tradable sector.
19
When the cumulative productivity growth
differential makes structural inflation exceed a
threshold (T), the distribution of value added
changes...........the curve shifts.
20
Condition for long-term transition. There is a
critical value for the growth rate of structural
inflation that can bring about transition.
21
Interpretation of Threshold T
22
Our approach departs from standard B-S analysis
in the following ways
  • We endogenize the relative sector sizes by
    defining them as a function of the productivity
    growth differentials.
  • We introduce leads and lags into the relation
    between productivity growth differentials and
    relative sector sizes, thereby capturing not only
    instantaneous effects, but also the effects of
    larger longer-term shifts in the structure of an
    economy.
  • We distinguish between short-term dynamics
    motivated by profit seeking economic agents
    under a given interval of sectoral composition,
    and long-term dynamics representing shifts in the
    prevailing interval of sectoral composition. We
    link these two dynamics.
  • We define transition as shifts of relative sector
    sizes in favor of the non-tradable sector
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