Price and Cost Competitiveness Misalignments of the Euro Area and of Its Main Economies According to a Quarterly BEER Model, 1999-2017

34 Pages Posted: 9 Jul 2019

Date Written: July 20, 2018

Abstract

This study first assesses recent misalignments of the real effective exchange rate (REER) of the euro area and of the Harmonized Competitiveness Indicators (HCIs) of its main economies, based on a quarterly Behavioural Equilibrium Exchange Rate (BEER) model. Next, it draws a comparison with comparable estimates published by the IMF and by CEPII. The BEER model here employed was first put forward by Fidora, Giordano and Schmitz (2017; 2018) and enables the assessment of the departure of actual REERs and HCIs from values consistent with underlying economic fundamentals (i.e. “equilibrium” values). The quarterly model has now been extended to cover a longer time span (1999-2017) and refined by employing new data sources, in particular relative to producer price indices, one of five alternative price/cost indicators used to derive the REERs and HCIs. There is evidence of a modest overvaluation of the euro-area REER in 2017, partly linked to the nominal appreciation of its currency in the second half of the year.

Keywords: price competitiveness, cost competitiveness, real effective exchange rate, equilibrium exchange rate, misalignments

JEL Classification: E31, F00, F31

Suggested Citation

Giordano, Claire, Price and Cost Competitiveness Misalignments of the Euro Area and of Its Main Economies According to a Quarterly BEER Model, 1999-2017 (July 20, 2018). Bank of Italy Occasional Paper No. 444, July 2018. Available at SSRN: https://ssrn.com/abstract=3211842 or http://dx.doi.org/10.2139/ssrn.3211842

Claire Giordano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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