The Balassa -Samuelson effect and Europe's Southern periphery
In the context of Drine and Rault (2003), this paper tests for the Balassa-Samuelson effect in four of Europe's Southern peripheral countries, namely Greece, Italy, Spain and Portugal. The Korean experience is used as a canonical case since there appears to be a consensus in the literature that the country did in fact experience the Balassa-Samuelson effect. Using time series cointegration techniques two sets of tests are conducted for each country. The first investigates the Balassa-Samuelson effect in a very broad sense examining whether the real exchange rate and the development degree of the economies (GDP per capita) are cointegrated. While the second, more explicit, test of the Balassa-Samuelson effect searches for a cointegratiog relationship between relative productivity differentials (between traded and nontraded sectors) and the real exchange rate. The results highlight the need to decompose GDP to its relative sectoral productivities when testing for the Balassa-Samuelson effect, otherwise estimates attained can be very misleading. Also, they show that only Spain experienced economic growth in a Balassa-Samuelson framework while for the remaining Southern Peripheral European countries, Greece, Italy and Portugal, the Balassa Samuelson hypothesis does not explain their long-run development experiences because certain assumptions underpinning the theory fail to hold.
Tzilianos, Elpida, "The Balassa -Samuelson effect and Europe's Southern periphery" (2006). ETD Collection for Fordham University. AAI3216926.