The Competitiveness in the Light of the Balassa-Samuelson Effect

Abstract

The paper aims to analyze the influence of the Balassa-Samuleson effect on the competitiveness of Bosniaand Herzegovina. As we know, theBalassa and Samuelson argue that developing economies have an appreciating currency, because they have relatively high inflation due to higher productivity growth in the production of tradable goods. This problem has existed, more or less, in all transitional countries in the EasternEurope, and it was particularly stressed in the countries with a fixed exchange rate. This paper just shows that in Bosnia and Herzegovina, in which monetary policy operates on the principles of "currency board", there is an extremely high influence of theBalassa-Samuelson effect, which leads not only to make a competitive position on the international market worse, but it brings up the question of sustainability of the existing currency board system.