DP4494 Productivity, Tradability and the Long-Run Price Puzzle
Author(s): | Paul R Bergin, Reuven Glick, Alan M. Taylor |
Publication Date: | July 2004 |
Keyword(s): | great divergence, real exchange rate, Ricardo-Harrod-Balassa-Samuelson effect |
JEL(s): | F40, F43, N10, N70 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=4494 |
Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the ?Balassa-Samuelson? effect. But looking back 50 years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.