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.
Taylor, Alan M., Paul R. Bergin, and Reuven Glick. 2004. “Productivity, Tradability, and the Long-Run Price Puzzle,” Federal Reserve Bank of San Francisco Working Paper 2004-08. Available at https://doi.org/10.24148/wp2004-08