Spatial panel data analysis with feasible GLS techniques: An application to the Chinese real exchange rate

Recent panel data approaches stress the importance of the location interdependence. Little has been done in the Balassa-Samuelson literature accounting for spatial dependence in the panel data context that allows for spatial autocorrelation. By utilising the recently developed Kapoor et al. (2007) spatial panel feasible GLS methods, we find that the Balassa-Samuelson effect in the Chinese economy during 1985 until 2000 generally does not appear to hold. However, the black market exchange rate tends to be more compatible with the theory.

Research Highlights► Recent panel data approaches stress the importance of the location interdependence. ► Little has been done in the Balassa-Samuelson literature with spatial dependence. ► We apply the Spatial Panel Feasible GLS Methods to the Chinese real exchange rate. ► We find that the Balassa-Samuelson effect in the Chinese economy does not hold.