William Davidson Institute Working Paper 487
determined. The inflation dynamics of these services is the main component of the
inflation pattern of the prices of the non-tradable as illustrated in the following figure 10.
Figure. 10. Inflation dynamics of the non-tradable and administratively managed
prices, trend (07:1997=1)
prices nontradable ------administrative prices
As long as the outcomes of our econometric tests are valid, our study rejects the
widely spread view that all accession countries experience the BS effect which is blamed
to cause real appreciation of their currencies.
However, dual inflation or the BS effect is likely to be present in the long run and
this is provided by the initial assumptions of its existence (wage and productivity
dynamics of both sectors). But its impact on the real exchange rate would be weaker due
to other factors like real wage rigidity and ongoing liberalization among others. In fact,
25