Harrod, Balassa and Samuelson (Re)Visit Eastern Europe

In this paper we investigate Harrod Balassa Samuelson (HBS) effect in 11 transition countries. A large number of empirical papers based on quite limited datasets has already been published on HBS in Eastern Europe. The major contribution of this paper is the fact that we estimate HBS with NACE6 quarterly national account data which enables us to divide data into tradable and nontradable sector as suggested by De Gregorio, Giovannini and Wolf (1994) without any unrealistic assumptions. Following Bergstrand (1991) together with relative productivity we also employ share of government consumption in GDP as an explanatory variable. Unlike in previous studies, results have indicated that it is possible to find univariate cointegrating vectors only in Bulgaria, Croatia and Lithuania, and panel cointegration test has indicated that it is possible to find strong evidence of cointegration in post 2000 sample. For the post 1995 period, rejection of the null hypothesis is dependent on the inclusion of government consumption as independent variable and methodology used (DOLS vs. OLS cointegration test).