Balassa-Samuelson Effect: Theoretical Expansion And Empirical Study In China

Exchange rate is a key variable in the open economy. Its fluctuations play an important role in a country’s international trade and financial capital markets,so various countries’ scholars study the influence factors of exchange rate volatility. The well-known analysis of Balassa and Samuelson provides an appealing explanation of the long-run behavior of the real exchange rate in terms of the productivity performance of traded relative to nontraded goods. There is considerable empirical research on Balassa-Samuelson effects based on time-series data, but this research has been confined to industrial countries.The time-series evidence on the working of the Balassa-Samuelson mechanism for developing countries has been largely unexplored.In this paper, we will test the long-term equilibrium relationship and short-term relationship between real exchange rate and relative productivity in China.The results show that it does not exist obvious effect of BS. Through the study we found that China’s trade sector real exchange rate significantly deviation from purchasing power parity (PPP), and low level of urbanization rate and labor market segmentation can not satisfy the assumptions of the BS effect. Trade sector real exchange rate plays a leading role in the real exchange rate changes. BS effect makes much smaller contribution. With the reality of our country, we found that the real exchange rate has a rising trend with the increasing urbanization rate and relative wage.Researches on relationship between real exchange rate and productivity are common, but few researches consider how the productivity affect the nominal exchange rate. In this article, we will build China’s open economy DSGE model to analyze the dynamic effect of the productivity to the nominal exchange rate. By impulse response simulation analysis we can find that productivity shocks make the nominal exchange rate began to have a negative impact, but over time, the impact effect changed from negative to positive.Finally, the paper puts forward some policy suggestions to the upgrading of industrial structure adjustment and reform of income distribution, urbanization construction and reform of exchange rate formation mechanism.