Balassa-Samuelson effect in Romania

Abstract

This paper deals with the Balassa-Samuelson effect in Romania. Using the cointegration technique, the main conclusions of the paper are that in the period 1998-2006 the average annual rate of inflation generated by the Balassa-Samuelson effect in Romania was between 0.11% in 2005 and 0.9% in 2000 in the case of the classical model (0.4% on average); in the extended model, which is considered more appropriate by us, the impact on inflation is higher and ranges between 0.69% in 2005 and 4.76% in 2000 (2.18% on average in 1998-2006). Regarding the impact of the Balassa-Samuelson effect on the real appreciation of the exchange rate, the results of the paper revealed that the real appreciation of the exchange rate due to the Balassa-Samuelson effect was between 0.24% and 1.94% in the case of the classical model and between 0.73% and 5.06% in the case of the extended model (2.31% on average in 1998-2006). The paper revealed also that the regulated prices and the price convergence play an important role in the Balassa-Samuelson effect in Romania.Balassa-Samuelson effect, convergence, relative prices, regulated prices