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Inflation – Harrod-Balassa-Samuelson effect in a DSGE model setting

Lenarčič, Črt (2019): Inflation – Harrod-Balassa-Samuelson effect in a DSGE model setting. Published in: Economic and Business Review , Vol. 21, No. 2 (2019): pp. 275-308.

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Abstract

This paper sets up a two-country two-sector dynamic stochastic general equilibrium model that introduces sector specific productivity shocks with quality improvement mechanism of goods. It provides a model-based theoretical background for the Harrod-Balassa-Samuelson phenomenon that describes the relationship between productivity and price inflation within different sectors of a particular economy. Both, the calibrated and the estimated model are able to show that the induced tradable sector productivity shocks drive the non-tradable and tradable sector price inflation upwards. By doing this, we overcome the problem that the tradable productivity increase in a typical open economy specification reduces the relative price of domestic tradable goods relative to the foreign ones.

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