Does the Productivity-Bias Hypothesis Hold in the Transition? Evidence from Five CEE Economies in the 1990s

The validity of the Balassa-Samuelson effect seems to be something of a stylized fact for transition countries. This article addresses the question as to whether the productivity bias hypothesis holds for the Czech Republic, Hungary, Poland, Slovakia, and Slovenia between 1991 and 2000. In so doing, vector autoregression model-based (VAR) cointegration analysis is employed. The results are rather varied and suggest that the Balassa-Samuelson effect is not of the same importance for each country. Generally, we find long-term cointegration relationships between productivity growth and relative prices while the link between relative prices and the real exchange rate is found to be much weaker.We then determine the extent to which the Balassa-Samuelson effect may influence inflation and real exchange rates during transition.