Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework
Kevin Stahler () and
Arvind Subramanian ()
Additional contact information
Kevin Stahler: Peterson Institute for International Economics
Arvind Subramanian: Peterson Institute for International Economics
No WP14-10, Working Paper Series from Peterson Institute for International Economics
Abstract:
Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better--Balassa-Samuelson-Penn (BSP)--framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation--defined as real competitiveness improvements in excess of nominal exchange rate changes--is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains.
Keywords: Eurozone; Competitiveness; Exchange Rates; Monetary Unions (search for similar items in EconPapers)
JEL-codes: F31 F41 F42 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
https://www.piie.com/publications/working-papers/v ... lassa-samuelson-penn (text/html)
Related works:
Journal Article: Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework (2014) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:iie:wpaper:wp14-10
Access Statistics for this paper
More papers in Working Paper Series from Peterson Institute for International Economics Contact information at EDIRC.
Bibliographic data for series maintained by Peterson Institute webmaster ().