Abstract
The aim of this study is
to test the existence of the Balassa-Samuelson (BS) effect in the Southeast
Europe. The effect, which represents one of the main theoretical explanations
for a prolonged period of deviation from the relative purchasing power parity,
should be of significant interest to countries from this region, as they all
seek to join the European Union and, ultimately, the Economic and Monetary
Union of the EU (EMU). In order to test the existence of the BS effect in the
region, panels of real exchange rates and GDP per employee of four potential
EMU members are tested for cointegration. These two variables were chosen as
the best available proxies for the price level and productivity, both of which
are used to develop the analytical framework of the BS effect. Rejection of the
Balassa-Samuelson hypothesis in this study has multiple implications, most
important of which are discussed and closely examined in the discussion
section. The paper also provides some recommendations on what should be done in
any further studies on the Balassa-Samuelson effect in the region.
Proliferation of such studies can be expected as these countries start the
process of joining the EMU.