Empirical testing of Balassa-Samuelson hypothesis with German and UK data

Josheski, Dushko and Koteski, Cane and Lazarov, Darko (2011) Empirical testing of Balassa-Samuelson hypothesis with German and UK data. Munich Personal RePEc Archive. p. 84.

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Abstract

There are a lot of studies that test Ballasa –Samuelson hypothesis also known as
Harrod-BalassaSamuelson effect directly via the effect of productivity, one possible
explanation is that PER Capita GDP is not good explanation for productivity (.i.e. Labor
productivity) differences; an increase (decrease) in relative efficiency of the distribution
sector with respect to foreign countries induces depreciation (appreciation) of the exchange
rate. After we obtained the number of co-integrated vectors we continue further to see
whether the CV tells us something about the long run relationship into the model, likelihood
ratio test of exactly identified restrictions test confirms that constant is insignificant variable
therefore we can confirm that there is long-run relationship in which the changes in Exchange
rate are positively correlated with the changes of ratio of German Consumer Price Index
(CPI) to the UK Retail Price Index (RPI). In order to test for relative PPP to support the
theoretical relationship between the variables, restrictions are put on the PPP knowing that
PPP and that downward movement in the series indicates increase of UK price level relative
to German price level. In each EC model there is an EC mechanism and coefficient on the co
integrating vector measures the rate per period at which one of the endogenous variables
adjusts. In the first equation the error correction mechanism is highly significant and
negative. If the system is out of equilibrium, alteration in the change of the exchange rates
will be downward (everything else ceteris paribus) compensating around 68% of the
disequilibrium per year. In the second equation error correction mechanism is also highly
significant but positive meaning that if the system is in disequilibrium changes of change in
the ratio of German CPI relative to UK Retail Price index will rise offsetting 15% of the
disequilibrium per year until the equilibrium rate of exchange rate will be achieved. Model
implies German Labor productivity to UK Labor productivity ratio doesn’t have significant
influence on explaining on relative change on prices not even on theexchange rate contrary to
Pugh, Beachil study

Item Type:	Article
Subjects:	Social Sciences > Economics and business Social Sciences > Social and economic geography
Divisions:	Faculty of Tourism and Business Logistics
Depositing User:	Cane Koteski
Date Deposited:	21 Nov 2012 09:25
Last Modified:	21 Oct 2014 13:39
URI:	https://eprints.ugd.edu.mk/id/eprint/1538

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