Exploring Price and Non-Price Determinants of Trade Flows in the Largest Euro-Area Countries

35 Pages Posted: 23 Jun 2015

Date Written: June 22, 2015

Abstract

Since the mid-2000s price-competitiveness indicators for some euro-area countries have been providing conflicting signals. Against a stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major competitiveness loss in Italy; we argue that the discrepancy mostly reflects a divergence of ULCM and PPI trends in competitor countries. Owing to the fading representativeness of labour on overall costs, price-based indicators appear to be more appropriate than those based on ULCMs to assess external competitiveness. In Italy ULC-based indicators play a less relevant role relative to price-deflated measures in explaining exports; the opposite holds true for Germany and France, whereas in Spain exports are insensitive to prices. Non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports. Imports react to price-competitiveness dynamics only in Italy; considering the participation in global value chains is useful to correctly identify import sensitivity to domestic and foreign demand.

Keywords: non-price competitiveness; price competitiveness; producer prices; unit labour costs

JEL Classification: F14, F62

Suggested Citation

Giordano, Claire and Zollino, Francesco, Exploring Price and Non-Price Determinants of Trade Flows in the Largest Euro-Area Countries (June 22, 2015). ECB Working Paper No. 1789, Available at SSRN: https://ssrn.com/abstract=2621489

Claire Giordano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Zollino (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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