A Stochastic Measure of International Competitiveness
62 Pages Posted: 27 Aug 2007
Date Written: May 30, 2007
Abstract
Government agencies produce indexes that purport to measure international competitiveness. The most common version is the real effective exchange rate, which is some form of weighted average of the real exchange rates of the country's trading partners. Such indexes convey a false sense of accuracy as they ignore the volatility among the component real exchange rates of the partners. As long as all real rates do not move in an equiproportionate fashion, in a fundamental sense real effective exchange rates are subject to estimation uncertainty. We demonstrate how this uncertainty can be measured and used to enhance current practice.
Keywords: Stochastic index numbers, real exchange rates, international competitiveness
JEL Classification: F30
Suggested Citation: Suggested Citation
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