Productivity, Tradability, and the Long-Run Price Puzzle


Paul R. Bergin

Alan M. Taylor

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2004-08 | June 1, 2004

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.

Article Citation

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

About the Author
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Reuven Glick is a group vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Reuven Glick