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Revisiting the Balassa-Samuelson Model with Markup Variations*

Published online by Cambridge University Press:  09 January 2015

Romain Restout
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Summary

This paper addresses the role of markup variations in the transmission process of cross-sectoral productivity differential shocks and government spending shocks to the relative price of nontradables. The Balassa-Samuelson model based on frictionless goods markets predicts that a rise in the sectoral productivity ratio by 1% raises the relative price by 1% while government spending changes leave the relative price unaffected. Using panel cointegration and unit root tests applied to a panel of fifteen OECD economies, our empirical evidence does not support these implications. We find that a rise in relative productivity by 1% raises the relative price of nontradables by only 0.70% and that an increase in government spending by 1% of GDP drives up the relative price by around 1%. This paper shows that these items of evidence can be successfully explained by a two-sector open economy model in which variations in the composition of demand for nontradables give rise to endogenous changes in the markups.

Cet article s’intéresse au rôle des variations des taux de marge lors de la transmission des chocs de productivité sectorielles et de dépenses publiques au prix relatif des biens non échangeables. Le modèle de Balassa-Samuelson dans lequel le marché des biens est parfaitement concurrentiel suggère que, premièrement, le prix relatif augmente de 1% suite à une augmentation du rapport des productivités sectorielles de 1%, et que, deuxièmement, les chocs de dépenses publiques n’ont aucun impact sur le prix relatif à long terme. Appliquant les methodes de cointegration en panel à un groupe de quinze pays de l’OCDE, nos résultats empiriques rejettent ces deux prédictions. Au contraire, nous montrons qu’une hausse de la productivité relative entre les deux secteurs de 1% augmente le prix relatif des biens non échangeables de seulement 0.70% et qu’une augmentation de la part des dépenses publiques dans le PIB de 1% entraîne une hausse du prix relatif d’environ 1%. Cet article montre ensuite que ces faits empiriques peuvent être répliques par un modèle d’économie ouverte à deux secteurs dans lequel les changements de la composition de la demande en biens non échangeables génèrent des variations endogènes des taux de marge.

Keywords

Balassa-Samuelson modelMarkupsProductivityGovernment expenditureE20E62F31F41effet Balassa-Samuelsontaux de margeproductivités sectoriellesdépenses publiquesE20E62F31F41
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 79 , Issue 3 , September 2013 , pp. 25 - 69
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2013 

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Footnotes

*

Parts of this paper have circulated earlier under the title “The Balassa-Samuelson Model in General Equilibrium with Markup Variations”. The author would like to thank the Editor and two referees for their useful comments and suggestions on previous drafts of this paper, as well as Sophie Béreau, Olivier Cardi, Nelly Exbrayat, Valérie Mignon and Alain Sand for their valuable comments. The financial support from the Belgian Federal Government (Grant PAI P6/07 “Economic Policy and Finance in the Global Equilibrium Analysis and Social Evaluation”) is also acknowledged.

†

Université de Lorraine (BETA) and Université Catholique de Louvain (IRES), [email protected].

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