Two basic assumptions of the Balassa-Samuelson model are the equality of wages across the tradable and non-tradable sectors and the validity of the PPP theory for tradables. In this paper, we analyse whether these assumptions are verified within a group of Eurozone countries. In general terms, our results indicate that neither hypothesis is confirmed over the period analysed (1973-2003). Next, we broaden the discussion to investigate whether, in each country, there is a cointegration relationship between relative prices, productivities and wages. We also look for a possible long-term relationship between real exchange rates, real exchange rates for tradables, and the differences in relative productivities and wages of Eurozone countries vis-a-vis Germany. We find that the role of wages in these relationships is hardly significant, but that there is strong evidence that prices in the tradable sector are an important explanatory variable of real exchange rates.

Key words: real exchange rates, productivity, nontradables, cointegration.
JEL Classification: C32, F31, F41.