Balázs Égert

The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?

This paper studies the Balassa-Samuelson effect in nine Central and East European countries. Using panel cointegration techniques, we find that productivity growth in the open sector leads to inflation in non-tradable goods. Because of the low share of non-tradables and the high share of food items in addition to regulated prices, the consumer price index is misleading when analyzing the Balassa-Samuelson effect. Consequently, the appreciation of the real exchange rate, which has been established as a stylized fact over the last decade, is caused only partly by the Balassa-Samuelson effect. We identify a trend increase in the prices of tradable goods as a contributing explanation.

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues

In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.

Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study

This paper studies the Balassa-Samuelson (B-S) effect in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. We use time series and panel cointegration techniques and show that the B-S effect works reasonably well in the transition economies under study during the period from 1991:Q1 to 2001:Q2. However, we find, that productivity growth does not fully translate into price increases because of the construction of the CPI indexes. We therefore argue that productivity growth will not hinder meeting the Maastricht criterion on inflation in the medium term. In addition, the observed appreciation of the CPI-deflated real exchange rate is found to be systematically higher compared with the real appreciation the B-S effect could justify, especially in the cases of the Czech Republic and Slovakia. This can be partly explained by the trend appreciation of the tradable price-based real exchange rate, increases in non-tradable prices due to price liberalization and demand-side pressures and the evolution of the nominal exchange rate determined by the nature of the exchange rate regime and the magnitude of capital inflows.

Estimating the impact of the Balassa-Samuelson effect on inflation and the real exchange rate during the transition

Abstract In this paper, we investigate whether the Balassa–Samuelson (B–S) effect holds for the Czech Republic, Hungary, Poland, Slovakia and Slovenia during the transition process. The co-integration analysis suggests that the importance of the B–S effect does differ across countries. Generally, we can establish long-term co-integration relationships between productivity growth and relative prices while the link between relative price movement and the Real Exchange Rate Developments turns out to be weaker. We seek to calculate the extent to which the B–S effect may influence inflation and the real exchange rate and subsequently discuss policy implications.

Infrastructure and Growth

Investment in network infrastructure can boost long-term economic growth in OECD countries. Moreover, infrastructure investment can have a positive effect on growth that goes beyond the effect of the capital stock because of economies of scale, the existence of network externalities competition enhancing effects. This paper analyses the empirical relationship between infrastructure and economic growth. Time-series results reveal a positive impact of infrastructure investment on growth. They also show that this effect varies across countries and sectors and over time. In some cases, these results reveal evidence of possible over-investment. Bayesian model averaging of cross-section growth regressions confirms that infrastructure investment in telecommunications and the electricity sectors has a robust positive effect on long-term growth (but not in railways and road networks). Furthermore, this effect is highly nonlinear as the impact is stronger if the physical stock is lower.

Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable

This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe (CEE). Our results indicate that the strength of the exchange rate pass-through substantially declined over time mainly due to a fall in inflation rates and to some extent due to the so-called composition effect. The asset price channel is weak and is likely to remain weak because of shallow stock and private bond markets and because of low stock and bond holdings of domestic household. House prices may become an exception with higher levels mortgage lending and with high owner occupancy ratios. While the credit channel could be a powerful channel of monetary transmission - as new funds raised on capital markets are close to zero in CEE - it is actually not, as both commercial banks and non-financial corporations can escape domestic monetary conditions by borrowing from their foreign mother companies. The moderately good news is, however, that those banks and firms are influenced by monetary policy in the euro area because their parent institutions are themselves subjected to the credit channel in the euro area. Canaux de transmission de la politique monetaire dans les PECO: une revue de la litterature Ce papier vise a synthetiser la litterature empirique portant sur le mecanisme de transmission monetaire, et tout particulierement dans les pays d’Europe centrale et orientale (PECO). Cette etude montre que l’effet du taux de change sur l’inflation a diminue au cours du temps principalement en raison de la baisse des taux d’inflation, mais aussi dans une certaine mesure suite a un effet dit de composition. Le canal des prix d’actifs est faible et le restera probablement en raison des marches d’actions et de titres obligataires prives peu developpes, mais aussi a cause d’un faible taux de detention d’actifs financiers par les menages. En revanche, avec l’accroissement du nombre de prets immobiliers et de menages proprietaires de leur appartements, les prix immobiliers peuvent jouer un role plus important a l’avenir. Meme si le canal du credit devrait etre un des canaux de transmission les plus puissants, sachant que le financement externe sur les marches est quasiment nul dans les PECO, tel n’est pas le cas pour autant. La raison en est que les banques commerciales mais aussi les entreprises peuvent echapper aux conditions monetaires nationales par le biais de financements obtenus aupres de leurs maisons meres implantees a l’etranger. La nouvelle quelque peu encourageante est que les entreprises meres sont elles-memes contraintes par la politique monetaire de la zone euro, exportant ainsi les effets du canal du credit dans les PECO.

Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis

This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates.

Assessing equilibrium exchange rates in CEE acceding countries: Can we have DEER with BEER without FEER? A critical survey of the literature

The ambition of this paper is to provide a thorough overview of equilibrium exchange rates in the acceding countries of Central and Eastern Europe. Therefore, theoretical models of equilibrium exchange rates are reviewed first and presented in a structured way. Subsequently, the existing body of the empirical literature aimed at investigating real exchange rate determination and possible misalignments is analyzed in a systematic manner. Finally, an attempt is made to sum up where we stand at the moment and what the major shortcomings of the approaches currently used in the literature are.

Investigating the Balassa-Samuelson Hypothesis in Transition: Do We Understand What We See?

This paper studies the Balassa-Samuelson effect in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. Time series and panel cointegration techniques are used to show that the BS effect works reasonably well in these transition economies during the period 1991:Q1 to 2001:Q2. However, productivity growth does not fully translate into price in-creases due to the structure of CPI indexes. We thus argue that productivity growth will not hinder the ability of the five EU accession candidates to meet the Maastricht criterion on inflation in the medium term. Moreover, the observed appreciation of the CPI-deflated real exchange rate is found to be systematically higher compared to the real appreciation justi-fied by the Balassa-Samuelson effect, particularly in the cases of the Czech Republic and Slovakia. This may be partly explained by the trend appreciation of the tradable-goods-price-based real exchange rate, increases in non-tradable sector prices due to price liberali-sation and demand-side pressures, and the evolution of the nominal exchange rate due to the exchange rate regime and magnitude of capital inflows.

Catching-up and inflation in Europe: Balassa-Samuelson, Engel???s Law and other Culprits

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.