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Analysis of the Relative Price of Nontradable Goods in the G7 Countries*1

October 2003
Masahiro Kawai *2
Munehisa Kasuya *3
Naohisa Hirakata *4

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  • *1 The authors are grateful to Hideo Hayakawa, Takatoshi Ito, Itsuo Sakuma, Hiroshi Yoshikawa, participants at a session at the 2002 Annual Meeting of the Japan Economic Society, participants at a seminar at the Bank of Japan, and other Bank of Japan staff members for their helpful comments. They have also benefited from excellent research assistance of Emi Arinaga and Sayaka Sasaki. Views and interpretations expressed in this paper are those of the authors, and do not necessarily reflect those of the Bank of Japan.
  • *2 University of Tokyo, E-mail: kawai@iss.u-tokyo.ac.jp
  • *3 Reseaech and Statistics Department, E-mail: munehisa.kasuya@boj.or.jp
  • *4 Reseaech and Statistics Department, E-mail: naohisa.hirakata@boj.or.jp

Abstract

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 :
E31, F41