An Empirical Test of Balassa-Samuelson Hypothesis:Some Evidence from China

It is a remarkable topic at all times whether the Balassa-Samuelson hypothesis, hold for real exchange rate in transition countries, but it doesn't become the focus in China until recently we start to test whether it is suitable for Renminbi exchange rate. In view of the fact that the pressure of Renminbi's revaluation grows gradually, as well as the PPP has a inclination of deviating from the equilibrium exchange rate in the long run, this paper takes a further examination and analysis of the Balassa-Samuelson hypothesis, based on other economists' former research, in aim to providing a useful angle for the observation of Renminbi exchange rate's trend. So we use our nation's empirical data from 1980 to 2005 to test this model by OLS in two periods which is divided at 1994. Our empirical results show that after the reformation the Renminbi exchange rate's trend display a strong positive correlation with the relative price level in sample period.