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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2003 > Analysis of the Relative Price of Nontradable Goods in the G7 Countries
Masahiro Kawai *2
Munehisa Kasuya *3
Naohisa Hirakata *4
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To analyze the relative price of nontradable to tradable goods, we build a two-country, two-sector dynamic open macro model that in based on consumers' intertemporal optimizing behavior. The model predicts that the relative price of nontradable goods depends on the cross-sectoral productivity differential, the cumulative current account imbalance, and fiscal expenditure on nontradable goods. Our empirical results using the G7 countries' annual data over the period 1970-1999 support our theoretical predictions. Especially, in Japan, the recent higher relative prices of nontradable goods are explained by sectoral productivity differentials as well as the cumulative current account and the degree of market openness.
Key words :
real exchange rate, relative price of nontradable goods, sectoral productivity differential, Balassa-Samuelson hypothesis.
JEL classification :