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
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: Suggested Citation