Beyond Balassa and Samuelson – Real Convergence, Capital Flows, and Competitiveness in Greece

32 Pages Posted: 22 Dec 2015

See all articles by Ansgar Hubertus Belke

Ansgar Hubertus Belke

University of Duisburg-Essen - Department of Economics and Business Administration; IZA Institute of Labor Economics; Centre for European Policy Studies

Ulrich Haskamp

University of Duisburg-Essen - Department of Economics and Business Administration

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Holger Zemanek

University of Leipzig - Institute for Economic Policy

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Date Written: September 21, 2015

Abstract

We scrutinize the role of capital flows in competitiveness in a set of seven euroarea member countries (Estonia, Greece, Latvia, Lithuania, Portugal, Slovenia, and the Slovak Republic) in the context of real convergence and crisis. A specific focus is on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets, placing a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to cause real wages to increase beyond productivity increases. The augmented Balassa-Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 show evidence of the Balassa-Samuelson effect if Greece is excluded from the panel. For Greece, this in turn provides evidence in favour of capital inflow-driven real wage increases in excess of productivity increases.

Keywords: Balassa-Samuelson effect; capital inflows; exchange rate regime; inflation; Greece; Latvia; Portugal; panel model; productivity differential; wages

JEL Classification: E24, F16, F31, F32

Suggested Citation

Belke, Ansgar Hubertus and Haskamp, Ulrich and Schnabl, Gunther and Zemanek, Holger, Beyond Balassa and Samuelson – Real Convergence, Capital Flows, and Competitiveness in Greece (September 21, 2015). Available at SSRN: https://ssrn.com/abstract=2706542 or http://dx.doi.org/10.2139/ssrn.2706542

Ansgar Hubertus Belke (Contact Author)

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for European Policy Studies ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

Ulrich Haskamp

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

Gunther Schnabl

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Holger Zemanek

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Strasse 12
Leipzig, 40109
Germany

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