Testing the Validity of the Balassa-Samuelson Hypothesis in High Middle Countries

According to the Balassa-Samuelson hypothesis, if an increase in productivity of the traded goods in a country is higher than the non-traded goods and the increase occurs at a higher level than the other countries, the price of non-traded goods in this country will be higher than that in the other countries. Therefore, the relative price of non-traded goods will increase between these countries. This increase in relative prices will also increase the real exchange rate. In the other words, currency of the country in question will appreciate. This paper uses the Balassa-Samuelson hypothesis and aims to determine the nexus between real exchange rate and productivity, using the data from 1990-2015 for 10 countries with high middle income. In that line, panel ARDL estimator has been used to obtain coefficients describing the long-term and short-term relation. The findings indicate that there is indeed a positive nexus between the real exchange rate appreciation and the productivity, in the long term. These results are also supported by variance decomposition and impulse-response functions. The results show that the Balassa-Samuelson hypothesis is valid for these 10 countries with high middle-income level