The real exchange rate and the Balassa-Samuelson hypothesis in SAARC countries: an appraisal

摘要

This paper empirically tests the Balassa-Samuelson (B-S) productivity bias hypothesis in seven South Asian countries. We use auto regressive distributed lag (ARDL) modelling to develop a dynamic structure of the B-S hypothesis. Using annual data from Penn World Table Version 7.0 and the ‘bounds test’, we found no evidence of the B-S hypothesis in six sampled countries (Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka) and the only exception was Bangladesh. We found that a 1% increase in labour productivity in Bangladesh relative to the US will lead to 2.5% appreciation in the real exchange rate of Bangladesh. The speed of adjustment towards equilibrium was found to be high, with short-run disequilibrium correcting by nearly 25% per annum in Bangladesh. The two endogenously determined structural breaks are found to be negative and statistically significant. These results add new insights to the time-series literature on the B-S hypothesis.View full textDownload full textKeywordsreal exchange rate, Balassa-Samuelson hypothesis, unit-root, endogenous structural breaks, ARDLJEL classificationsC22, F11, F31Related var addthis_config = { ui_cobrand: "Taylor & Francis Online", services_compact: "citeulike,netvibes,twitter,technorati,delicious,linkedin,facebook,stumbleupon,digg,google,more", pubid: "ra-4dff56cd6bb1830b" }; Add to shortlist Link Permalink http://dx.doi.org/10.1080/13547860.2012.640000