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Federal Reserve Bank of San Francisco
Working Paper Series
Productivity, tradability, and the long-run price puzzle
Paul R. Bergin
Reuven Glick
Alan M. Taylor
Abstract

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the “Balassa-Samuelson” effect. But looking back fifty years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability allows for theory and history to be consistent for a wide range of underlying productivity shocks.


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Paul R. Bergin & Reuven Glick & Alan M. Taylor, Productivity, tradability, and the long-run price puzzle, Federal Reserve Bank of San Francisco, Working Paper Series 2004-08, 2004.
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Keywords: Prices ; Productivity ; Econometric models
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