Is there a Harrod-Balassa-Samuelson effect? New panel data evidence from 28 European countries

Harrod-Balassa-Samuelson phenomenon describes the relationship between productivity and price inflation within different sectors of a particular economy, where the sectoral productivity differential stands as one of the possible drivers of the (structural) price inflation. The Harrod-Balassa-Samuelson effect could therefore represent an additional inflation source of the economy. From an economic policy perspective it is important to address this issue, in order to contain inflation sufficiently low with adequate policy measures. Using a dynamic panel data model the Harrod-Balassa-Samuelson hypothesis is tested and confirmed by applying a strict distinction between the sectoral price inflation and the average labour productivity growth data from the 1990-2017 period for 28 European countries. Additionally, we provide inflation simulations based on the results that confirm the existence of the Harrod-Balassa-Samuelson effect.