Working Paper: CEPR ID: DP4494
Authors: Paul R. Bergin; Reuven Glick; Alan M. Taylor
Abstract: Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the ?Balassa-Samuelson? effect. But looking back 50 years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.
Keywords: Great Divergence; Real Exchange Rate; Ricardo-Harrod-Balassa-Samuelson Effect
JEL Codes: F40; F43; N10; N70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national price levels (E30) | incomes per capita (D31) |
| recent productivity advancements (O49) | observed price levels (E30) |
| productivity shocks (O49) | changes in tradability (F19) |
| changes in tradability (F16) | price levels (E30) |
| productivity (O49) | price levels (E30) |
| time period (1950 to 1995) (P17) | slope of the price-income relationship (D31) |