Rethinking Prices and Markets Underlying Price-Competitiveness Indicators

30 Pages Posted: 9 Jul 2019

Date Written: July 20, 2018

Abstract

A comprehensive analysis of price and cost competitiveness warrants an assessment of a range of alternately deflated nominal effective exchange rates. Here, we focus solely on the price-competitiveness indicator currently published by the Bank of Italy (Felettigh et al., 2015), which is based on the producer prices of domestically-sold manufactures, and we refine its measurement. First, we update the data sources for the producer price index. Revisions mainly refer to non-euro area countries, yet also affect relative prices and therefore the price-competitiveness trends of the four main euro-area economies. These countries have performed better according to the revised indicators, in particular since 2010. Second, we present a novel three-market view of price-competitiveness indicators by splitting destination markets. The overall indicator encompassing competitive pressures on both the import and the export side can indeed be broken down into three components: the domestic market, where local producers are rivalled by foreign competitors with their import penetration; euro-area markets, where all countries compete; and non-euro-area markets, where, similarly, all countries compete. Whereas France and Germany have displayed similar price-competitiveness developments in both the euro and non-euro area markets over the entire period since 1999, Italy and Spain have performed better in the non-euro area than in the euro-area markets. Competitiveness in the domestic market and that in non-euro area markets are the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.

Keywords: price-competitiveness indicators, real effective exchange rates, producer prices, destination markets, import competition

JEL Classification: F10, F30, F31

Suggested Citation

Felettigh, Alberto and Giordano, Claire, Rethinking Prices and Markets Underlying Price-Competitiveness Indicators (July 20, 2018). Bank of Italy Occasional Paper No. 447, July 2018. Available at SSRN: https://ssrn.com/abstract=3212740 or http://dx.doi.org/10.2139/ssrn.3212740

Alberto Felettigh

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Claire Giordano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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