Real Exchange Rate Movements in Developed and Developing Economies: A Reinterpretation of the Balassa‐Samuelson Hypothesis*

Abstract

This article applies panel‐data techniques to examine the Balassa‐Samuelson hypothesis (BSH) for 33 countries. We introduce a new approach for classifying traded and non‐traded industries which allows for country‐specific heterogeneity over each industry and changes in classifications across periods. We find that in developed countries, productivity growth in traded goods leads to a real depreciation of the currency, inconsistent with the BSH; however, higher growth countries experience real appreciation. The results of developing countries support the BSH in that higher productivity growth in traded goods leads to real appreciation.

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