Does productivity drive the real exchange rate movements? A re-examination of the Balassa–Samuelson hypothesis
ISSN: 0144-3585
Article publication date: 2 June 2020
Issue publication date: 26 August 2020
Abstract
Purpose
The primary purpose of this study is to examine whether the classification of industries into the tradable and nontradable matters for the Balassa–Samuelson (BS) effect.
Design/methodology/approach
The study uses annual data for 38 countries from 1995 to 2014. To examine whether the classification of industries matter, the study proceeds with two approaches, that is, “traditional” and “benchmark”.
Findings
First, by applying panel cointegration tests of Pedroni and Westerlund, the results validate the BS hypothesis. However, the coefficients of long-run elasticities show appreciation of real exchange rate (RER) due to increase in productivity in the case of “traditional approach”, whereas depreciation of RER in the case of “benchmark approach”. Second, by applying the Dumitrescu-Hurlin panel Granger causality test, the results reveal the bi-directional causality among RER and productivity for both the approaches. Further, to provide more insights, the study employs a fixed-effects panel threshold model. The results indicate that increase in productivity leads to both appreciation and depreciation of RER depending on threshold regimes.
Practical implications
The study ascertains that the evidence of BS effect depends on the choice of approach considered. However, irrespective of the classification, there exists a BS effect beyond a threshold.
Originality/value
Although the BS effect is well established in the literature; there is no study examining the importance of classification of industries at a disaggregated level. Furthermore, there is no consideration of threshold effects.
Keywords
Acknowledgements
The authors gratefully acknowledge the valuable suggestions received from the editor and anonymous referee in the earlier draft of this paper. The usual disclaimer applies.
Citation
Jangam, B.P. and Rath, B.N. (2020), "Does productivity drive the real exchange rate movements? A re-examination of the Balassa–Samuelson hypothesis", Journal of Economic Studies, Vol. 47 No. 5, pp. 1093-1118. https://doi.org/10.1108/JES-05-2019-0197
Publisher
:Emerald Publishing Limited
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