MEASUREMENT OF THE EXCESS INFLATION IN THE BALASSA SAMUELSON MODEL IN THE COUNTRIES OF THE SOUTH CAUCASUS

Abstract Catching-up economies are experiencing excess inflation, as revealed by the Balassa-Samuelson hypothesis. In this study, we give an estimate for the BS effect, by applying the model to Armenia, Azerbaijan, and Georgia throughout a three-decade period starting in 1993 and ending in 2022. Our results confirm the persistence of the BS effect, in consistence with the assumptions of the inflation targeting framework of these countries’ monetary authorities. The theory of the Balassa-Samuelson effect also implies that within their floating exchange rate regimes, these countries are experiencing price and wage adjustments, as described in the analysis of their monetary policy.