A novel three-market view of price competitiveness

Abstract

A country's price competitiveness is generally proxied by the real effective exchange rate of its currency. In this article we present a novel three-market breakdown (domestic, euro-area and non-euro area markets) of this measure, with an application to the four main euro-area countries. Price-competitiveness developments are indeed found to be heterogeneous across markets, thereby confirming the usefulness of this decomposition. In particular, we find that in the 1999-2018 period only Germany recorded comparable (large) gains in both euro and non-euro area markets. France posted a larger gain, and Spain marked a smaller loss, in euro-area markets; conversely, Italy's mild improvement was greater in non-euro area markets. Finally, competitiveness in the domestic market and that in non-euro area markets are found to be the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.

Global Firms

“…Firm decisions in this framework involve the organization of global production chains. 13 Each final-goods firm chooses the set of production countries in which to operate plants, taking into account the location of these facilities relative to final-goods markets and their location relative to sources of intermediate inputs. Each final-goods firm also chooses the set of markets to supply from each plant, the range of products to export from each plant to each market, the set of countries from which to source intermediate inputs for each product in each plant, and imports of each input for each product in each plant.…”

“…We analyze the final-goods firm's optimal exporting and importing decisions in two stages. First, for given sets of countries for which the fixed production costs ( F i P ), fixed exporting costs ( F mi X ), and fixed sourcing costs ( F ij I ) have been incurred, and for a given set of products for which the product fixed exporting costs ( F mik K ) have been incurred for each production location and market, we characterize the firm's optimal decisions 13 The determinants and implications of global production chains are explored in Antràs and Chor (2013); Alfaro et al (forthcoming); Baldwin and Venables (2013); Costinot, Vogel, and Wang (2013); Dixit and Grossman (1982); Grossman and Rossi-Hansberg (2008); Johnson and Noguera (forthcoming); Melitz and Redding (2014b);and Yi (2003). of which intermediate inputs to source from each country, how much of each intermediate input to import from each source country, and how much of each product to export to each market.…”

How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation

“…Since 2010, all REER measures for Germany have pointed unanimously to a 12 As discussed more thoroughly in Giordano (2018), the IMF-WEO PPP rate, which is used in this paper as one of two PPP sources, is obtained by retropolating the 2011 PPP rate with the GDP deflator growth rate; the further the period relative to the benchmark year, the less precise is the measured PPP level. Concerning the PPI instead, sourced from the Bank of Italy, as documented in Felettigh and Giordano (2019), the earlier the years in the sample the more heterogeneous are the sources and the price aggregate employed. substantial undervaluation, which peaked on average in 2012 at nearly 9%.…”