International Competitiveness of the Mediterranean Quartet: A Heterogeneous-Product Approach by Herman Z. Bennett; Ziga Zarnic

Author:Herman Z. Bennett; Ziga Zarnic
Language: eng
Format: epub
ISBN: 9781452773292
Publisher: International Monetary Fund
Published: 2008-08-15T00:00:00+00:00

Where Δt% refers to the growth rate of the index observed from 1998 to year t and i refers to the country whose REER is analyzed.

Second, we study the difference observed between the two estimations of the REER considered, for example between RG and R1G, but consider each estimator relative to the corresponding REER observed in the remaining 11 countries of the euro area. This difference-in-difference estimator is computed following equation 8.

Where Δt% refers to the growth rate of the index observed from 1998 to year t, i refers to the country whose REER is analyzed, and EA refers to the remaining 11 countries of the euro area.7

The difference-in-difference estimator (DD for short) is our preferred estimator for two reasons. First, it allows us to control for methodological issues specific to each type of estimation that could be driving the results without necessarily reflecting changes in relative cost competitiveness. Second, it allows us to control for the equivalent results observed in the rest of 11 euro area countries. Therefore, the DD estimator represents the change in the relative international competitiveness position between the euro area countries. This does not mean that the DD estimator considers only direct competitors from the euro area, but that it compares among euro area countries each country’s position with respect to direct competitors across the world.

The euro area countries are all part of the same currency union, and therefore, are a natural benchmark to compare the evolution of the REER in each of the MQ countries and control for potential methodological differences particular to each type of estimation. This approach has also an important economic meaning. The exchange rates between euro area countries are fixed—although the euro is still sensitive to the international competitiveness of the euro area as a whole, in line with the standard exchange rate mechanisms associated with floating currencies. No rebalancing through nominal exchange rate movements is then possible, but only through productivity and wage growth differentials, which tend to take longer to materialize. As a result, divergence in international competitiveness between euro area countries is an important element when assessing the medium-term economic perspective of individual euro area countries.

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