Kaperoni : What is the Balassa-Samuelson Effect Hypothesis?
Kaperoni : what is the Balassa-Samuelson effect hypothesis?
IQD CALLS Chat Wednesday Night 3-17-20
Sandyf @Kaperoni sandyf no, I'm saying you have it wrong.
No I haven't, I have referenced documented facts that show countries that have floated the currency under similar financial circumstances as Iraq have faced devaluation, but feel free to think that is wrong.
I also said that Iraq will not see the conditions necessary for a successful transition in our lifetime and you are welcome to disagree.
You are the one in the wrong to continually push a case for a successful transition when it is not going to happen.
Kaperoni sandyf I'm not disputing there are other countries that have floated that have not had success. Including Middle East countries like Tunisia, Egypt etc. But i dont make up stories or draw conclusions, i find facts. And the fact is the IMF directly told the CBI this during the IMF Article IV consultation in 2013/14..
Kaperoni 14. The de facto fixed exchange rate has served Iraq well. The authorities agreed that a stable nominal exchange rate provides a valuable anchor for inflation expectations in an uncertain environment, and intend to continue implementing this policy for the foreseeable future.
In the medium term, staff encouraged the authorities to consider creating the conditions which would make possible a move to a more flexible exchange rate policy.
Such flexibility could allow a predictable and gradual appreciation of the nominal exchange rate, triggered by strong oil revenues and the Balassa-Samuelson effect, to accommodate a possible real exchange rate appreciation while keeping domestic inflation low.”
Kaperoni Now what does that mean?
Kaperoni The IMF recommends that the CBI start.. “creating the conditions which would make possible a move to a more flexible exchange rate policy" (float).
This would prepare them for a more “predictable and gradual appreciation of the nominal exchange rate.”
It would occur (triggered) by strong oil revenues and “Balassa-Samuelson effect” hypothesis.
So what is the Balassa-Samuelson effect hypothesis?
We will get into this…as this little nugget is very important to us as dinar investors.
We already know the plan is to float dinar based on the IMF statement above (gradual appreciation).
Kaperoni When you search Wikipedia, you get an explanation for this as…”Balassa–Samuelson (BS) hypothesis implies that countries with rapidly expanding economies should tend to have more rapidly appreciating exchange rates.”
In other words, the IMF themselves are acknowledging (by saying Balassa–Samuelson effect in this Article IV document) the dinar will rise rapidly.
Further research on Balassa-Samuelson effect brings us this…
“In 1964, academics Bela Balassa, a Hungarian economist, and Paul Samuelson, a Nobel-Laureate economist, independently observed that countries with higher levels of productivity growth experienced rapidly rising real wages and so appreciating real exchange rates.
Academic studies since have suggested the picture is not as simple as Mr Balassa and Mr Samuelson first thought and that many other factors can also influence the model.
However, many long term investors in emerging market currencies, for example, have been able to benefit from the appreciation of those currencies which is arguably due to the Balassa-Samuelson effect.”
The key here is the last sentence… “many long term investors in emerging market currencies, for example, have been able to benefit from the appreciation of those currencies which is arguably due to the Balassa-Samuelson effect.”
Kaperoni In other words, the IMF themselves are acknowledging (by saying Balassa–Samuelson effect in this Article IV document) the dinar will rise rapidly.
Kaperoni Further research on Balassa-Samuelson effect brings us this…
“In 1964, academics Bela Balassa, a Hungarian economist, and Paul Samuelson, a Nobel-Laureate economist, independently observed that countries with higher levels of productivity growth experienced rapidly rising real wages and so appreciating real exchange rates.
Academic studies since have suggested the picture is not as simple as Mr Balassa and Mr Samuelson first thought and that many other factors can also influence the model.
However, many long term investors in emerging market currencies, for example, have been able to benefit from the appreciation of those currencies which is arguably due to the Balassa-Samuelson effect.”
Kaperoni The key here is the last sentence… “many long term investors in emerging market currencies, for example, have been able to benefit from the appreciation of those currencies which is arguably due to the Balassa-Samuelson effect.”
Kaperoni In other words, this reference to the “Balassa-Samuelson effect” hypothesis which in essence is described as “a rapidly expanding economy creates a rapidly appreciating exchange rate” will give us an opportunity to benefit from that appreciation.
That can only mean free float. The word “rapid” only make sense in a free float. It also means the IMF knows and endorses the plan. It also means that the dinar we hold is legitimate and was sold with an intended purpose.
Kaperoni Go back to the Strategic Framework Agreement/TIFA we learned above that it cannot go into force until Iraq (the CBI) has “freedom of movement” of capital.
Which is clearly defined as acceptance of IMF Article VIII. When we review the documents from Iraq and US, they both confirm the intention is to enter this agreement “into force” before the end of the year.
In other words, the US Gov expect the Dinar to be internationally convertible before the end of 2013. Of course that is subject whether or not Iraq can achieve this goal.
Kaperoni Obviously nothing is happened and this was put out with the intention of 2013/14. There have been many setbacks with monetary policy over the years including Shabibi kicked out, 3 other gov of the CBI, worn-out dinar, stability issues and meeting IMF guidelines etc and Iraq is not anywhere close to being ready at this time either.
They have work to do. They need to form the government, get stability, passed the laws and create the conditions so investors want to come and create a private sector and invest. But this does lay out the plan.
Kaperoni Have a good night.