Testing the Balassa-Samuelson Effect: Implications for Growth and the PPP.

The derivation of the Balassa–Samuelson effect allows for different empirical specifications that may have important economic implications. Problems related to spurious regression could arise from the mixed order of integration of the series used and from the lack of long run stable relationship among the variables of the model. This paper addresses these problems by using the bounds testing approach developed by Pesaran et al. [J. Appl. Economet. 16 (2001) 289]. Our empirical results do not show supportive evidence for the Balassa–Samuelson effect in the long run. This seems to suggest the holding of the PPP. However, one of the implications of the PPP is that the real exchange rate does not have any real impact on the economy. Further empirical analysis rejects this last implication. In fact, real exchange rate seems to have a long run impact on relative growth rates.