Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries

We decompose real appreciation in tradables derived from producer price indexes in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (the substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for commodity like goods. Copyright (c) 2006 The Authors Journal compilation (c) 2006 The European Bank for Reconstruction and Development..