The Penn?Balassa?Samuelson effect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price?income relation is actually non-linear and turns negative among low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result. Rather, the different stage of development between countries can explain this new finding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data. This provides additional understanding of real exchange rate determinants in developing countries. ? 2016 Elsevier B.V.

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1 September 2016

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Journal of International Economics 102, pp.291-309, 2016

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DOI: 10.1016/j.jinteco.2016.07.009

https://www.sciencedirect.com/science/article/abs/pii/S0022199616300873

This Journal article is published under the centre's Trade programme.