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A Stochastic Measure of International Competitiveness

Author

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  • Kenneth W. Clements

    (Department of Economics, The University of Western Australia)

  • H.Y Izan

    (Department of Economics, The University of Western Australia)

  • Yihui Lan

    (Department of Economics, The University of Western Australia)

Abstract

Government agencies around the world produce indexes that purport to measure international competitiveness. The most common version is the real effective exchange rate, which is some form of weighted average of the real exchange rates of the country’s trading partners. Such indexes convey a false sense of accuracy as they ignore the volatility among the component real exchange rates of the partners. As long as all real rates do not move in an equiproportionate fashion, in a fundamental sense real effective exchange rates are subject to estimation uncertainty. We demonstrate show how this uncertainty can be measured and used to enhance current practice.

Suggested Citation

  • Kenneth W. Clements & H.Y Izan & Yihui Lan, 2005. "A Stochastic Measure of International Competitiveness," Economics Discussion / Working Papers 05-15, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:05-15
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