Working Paper: NBER ID: w10569
Authors: Paul 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 fifty 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: Productivity; Tradability; Price Levels; 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 |
|---|---|
| Productivity shocks (O49) | Changes in tradability of goods (F19) |
| Changes in tradability of goods (F19) | Influencing relative prices (F16) |
| Higher productivity in traded goods (F12) | Stronger BS effect (C92) |
| Higher productivity in traded goods (F12) | Higher price levels in richer countries (P22) |
| Higher productivity in traded goods (F12) | Increased slope of the relationship between price levels and income (E31) |