A Stochastic Measure of International Competitiveness*

Kenneth Clements, H. Y. Izan and Yihui Lan

International Review of Finance, 2009, vol. 9, issue 1‐2, 51-81

Abstract: Government agencies 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 how this uncertainty can be measured and used to enhance current practice.

Date: 2009
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https://doi.org/10.1111/j.1468-2443.2009.01085.x

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Working Paper: A Stochastic Measure of International Competitiveness (2005)
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