Balassa-Samuelson Effect in Emerging Market Economies- An Empirical Examination

Verma, Radheshyam and Nath, Siddhartha and Bhowmick, Chaitali and Yadav, Swastik (2025): Balassa-Samuelson Effect in Emerging Market Economies- An Empirical Examination.

Abstract

This study revisits the Balassa-Samuelson (B-S) hypothesis for 16 inflation-targeting emerging market and developing economies (EMDEs) to test whether their inflation differential with the advanced economies (AEs) could be explained through the productivity channel. The study finds positive and significant impact of total factor productivity (TFP) and labour productivity (LP) growth differentials on inflation differentials between AEs and inflation targeting EMDEs. The B-S effect is estimated in the range 1.6-2.5 percentage points for India. The average B-S effect for the inflation targeting EMDEs, however, is found at a lower level at 0.5-0.8 percentage points. This difference in the B-S effect between India and EMDEs arises from India’s higher TFP growth (vis-à-vis AEs) compared to the EMDEs. The sectoral level analysis also corroborates these findings. Our findings provide an empirical support to the role of productivity growth differential in explaining the inflation differential between AEs and major EMDEs in the medium term.

• Item Type: MPRA Paper
• Language: English
• Keywords: TFP, Inflation targeting, Balassa-Samuelson, productivity differential, traded-non-traded sector
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

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