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Rethinking prices and markets underlying price-competitiveness indicators

Alberto Felettigh () and Claire Giordano ()

No 447, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: A comprehensive analysis of price and cost competitiveness warrants an assessment of a range of alternately deflated nominal effective exchange rates. Here, we focus solely on the price-competitiveness indicator currently published by the Bank of Italy (Felettigh et al., 2015), which is based on the producer prices of domestically-sold manufactures, and we refine its measurement. First, we update the data sources for the producer price index. Revisions mainly refer to non-euro area countries, yet also affect relative prices and therefore the price-competitiveness trends of the four main euro-area economies. These countries have performed better according to the revised indicators, in particular since 2010. Second, we present a novel three-market view of price-competitiveness indicators by splitting destination markets. The overall indicator encompassing competitive pressures on both the import and the export side can indeed be broken down into three components: the domestic market, where local producers are rivalled by foreign competitors with their import penetration; euro-area markets, where all countries compete; and non-euro-area markets, where, similarly, all countries compete. Whereas France and Germany have displayed similar price-competitiveness developments in both the euro and non-euro area markets over the entire period since 1999, Italy and Spain have performed better in the non-euro area than in the euro-area markets. Competitiveness in the domestic market and that in non-euro area markets are the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.

Keywords: price-competitiveness indicators; real effective exchange rates; producer prices; destination markets; import competition (search for similar items in EconPapers)
JEL-codes: F10 F30 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mac
Date: 2018-07
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