More Evidence in Favor of the Balassa–Samuelson Hypothesis

Abstract

This study provides additional evidence of a significant long‐run relationship between the relative price of nontradables and real output, consistent with the productivity‐bias hypothesis of Balassa and Samuelson. The results, however, also indicate that additional permanent supply shocks, specifically real oil prices, need to be considered. In every case, relative prices are significantly affected by permanent innovations in real output and real oil prices. The general lack of evidence of cointegration, however, points to the possibility that additional long‐run determinants of relative prices have been omitted.

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