Business & Management Studies

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.