| Abstract: | The Balassa-Samuelson effect is often seen as the prime explanation of the continuous real appreciation of Central and East European (CEE) transition countries' currencies against their western counterparts. A simple model shows that productivity shocks work not only through a Balassa-type supply channel but also through an investment demand channel. Therefore, empirical evidence apparently in favour of Balassa-Samuelson effects may require a re-interpretation. The model is estimated for a panel of CEE countries. The results are consistent with the model palusibly explain the observed real appreciation and support the existence of the proposed investment demand channel. JEL no. F31, F41, C33 The paper represents the author's personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank. |
