Harrod Balassa Samuelson effect and the role of distribution sector: an empirical case study of Serbia and EMU

This research aims to test the functionality of the standard and the modified HBS model, with the intention to discover whether sectoral differences in labor productivity affect the dinar/euro real exchange rate. The first part of the analysis is based on the standard HBS model, which mathematically formalizes the dependence of the real exchange rate on the difference in the relative labor productivity in the open sector between Serbia and the EMU. The second part of the research relies on a modified version of the HBS model which differs from the standard HBS model since the effect of the distribution sector is separately analyzed. The empirical testing of both models was performed by applying the Johansen and the Engle-Granger tests. The results obtained by analyzing the standard HBS model indicates that there is no reliable evidence based on which it can be concluded that either the difference in the relative labor productivity in the open sector between Serbia and the EMU translates onto the difference in the relative prices of non-tradable goods or that the difference in prices affects the real exchange rate of the dinar against the euro. Furthermore, the analysis of the modified HBS model does not affect the previous results. Based on these findings, it can be concluded that the real euro/dinar exchange rate is not determined solely by sectoral differences in labor productivity, and that in future perspective Serbia will not have to choose between the dynamic economic growth and the membership in the EMU.