Balassa-Samuelson Effect in Transition Economies: The Case of Slovenia

Abstract

Paper presents a first-hand examination of the Balassa-Samuelson effect in Slovenia. Different measures of real exchange rate are presented in order to provide arguments for the Balassa-Samuelson effect estimation using external real exchange rate measure. It is argued that on average one percent increase in productivity differential between labor productivities in industry and services appreciated external real exchange rate by almost 1.5 percent in the period from 1993:1 to 2001:2. At the same time, one percent increase in productivity differential caused about 1.7 percent increase in CPI. The results are in line with other studies on real exchange rate behavior in transition economies.