Working Paper: CEPR ID: DP5982
Authors: J. Peter Neary
Abstract: This paper reviews alternative approaches to measuring an economy's cost competitiveness and proposes some new measures inspired by the economic theory of index numbers. The indices provide a theoretical benchmark for estimated real effective exchange rates, but differ from standard measures in that they are based on marginal rather than average sectoral shares in GDP or employment. The use of the new indices is illustrated by some simple calculations which highlight the potential exposure of the Irish economy to fluctuations in the euro-sterling exchange rate.
Keywords: competitiveness; economic theory of index numbers; European Monetary Union; EMU; real effective exchange rates; REERs
JEL Codes: C43; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| traditional measures of real effective exchange rates (REER) based on average sectoral shares (F31) | vulnerability of an economy to exchange rate changes (F31) |
| marginal sectoral shares (E25) | exposure to fluctuations (F31) |
| true GDP-neutral REER index (F31) | assessment of competitiveness (F23) |
| exchange rate movements (F31) | economic performance (P17) |
| exchange rate movements (F31) | competitiveness (L13) |