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International Competitiveness of the Mediterranean Quartet:A Heterogeneous-Product Approach

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  • Herman Z. Bennett
  • Ziga Zarnic

Abstract

The real effective exchange rate (REER) is the most commonly used measure for assessing international competitiveness. We develop a methodology to estimate the REER that incorporates two distinctive elements that are not considered in the current literature and apply it to the Mediterranean Quartet (MQ) of Greece, Italy, Portugal, and Spain, whose common pattern of real appreciation has created concern in policy and academic circles. The two elements that we add to the existing literature are (i) product heterogeneity when identifying each country's international competitors and their weights and (ii) a comprehensive treatment of services exports. Our refined measure suggests a modest reduction in the observed REER gap between the MQ countries and the other euro area countries. In particular, considering product heterogeneity and services exports implies a lower real appreciation from 1998 to 2006 on the order of 2-3 percent for all MQ countries. These are difference-in-difference estimates relative to the results obtained for the rest of the euro area countries using the same methodology.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/240.

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Length: 61
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/240

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Keywords: Euro Area; Services sector;

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References

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  1. Pierre-Richard Agénor, 1995. "Competitiveness and External Trade Performance of the French Manufacturing Industry," IMF Working Papers 95/137, International Monetary Fund.
  2. Bayoumi, Tamim & Jayanthi, Sarma & Lee, Jaewoo, 2006. "New Rates from New Weights," CEPR Discussion Papers 5860, C.E.P.R. Discussion Papers.
  3. J Peter Neary, 2005. "Measuring Competitiveness," Working Papers 200521, School Of Economics, University College Dublin.
  4. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  5. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc.
  6. Ian Marsh & Stephen Tokarick, 1996. "An assessment of three measures of competitiveness," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(4), pages 700-722, December.
  7. Mico Loretan, 2005. "Indexes of the foreign exchange value of the dollar," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Win, pages 1-8.
  8. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  9. Valerie Cerra & Jarkko Soikkeli, 2002. "How Competitive is Irish Manufacturing?," IMF Working Papers 02/160, International Monetary Fund.
  10. Paul E. Jensen, 2006. "Trade, Entry Barriers, and Home Market Effects," Review of International Economics, Wiley Blackwell, vol. 14(1), pages 104-118, 02.
  11. Thomas Hatzichronoglou, 1997. "Revision of the High-Technology Sector and Product Classification," OECD Science, Technology and Industry Working Papers 1997/2, OECD Publishing.
  12. Martine Durand & Jacques Simon & Colin Webb, 1992. "OECD's Indicators of International Trade and Competitiveness," OECD Economics Department Working Papers 120, OECD Publishing.
  13. Luca Buldorini & Stelios Makrydakis & Christian Thimann, 2002. "The effective exchange rates of the euro," Occasional Paper Series 02, European Central Bank.
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Cited by:
  1. Zemanek, Holger & Belke, Ansgar & Schnabl, Gunther, 2009. "Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness," IZA Policy Papers 7, Institute for the Study of Labor (IZA).
  2. Fernando Alexandre & Pedro Bação & João Cerejeira & Miguel Portela, 2009. "Aggregate and sector-specific exchange rate indexes for the Portuguese economy," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 30, pages 6-28, December.
  3. Jules Leichter & Cristina Mocci & Stefania Pozzuoli, . "Measuring External Competitiveness:An Overview," Working Papers 2, Department of the Treasury, Ministry of the Economy and of Finance.
  4. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2010. "Current account balances and structural adjustment in the euro area," International Economics and Economic Policy, Springer, vol. 7(1), pages 83-127, May.

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