Using the simple arbitrage model, we decompose real appreciation in tradables in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for a commodity like goods.
Keywords:Purchasing power parity, pricing-to-market, transition, real appreciation, exchange rates
Issued: December 2004
Published as: "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries", Economics of Transition, Vol.13, Iss.3, p.547-573, 2006
Download CNB WP No. 9/2004 (pdf, 531 kB)