The role of price and cost competitiveness for intra- and extra-euro area trade of euro area countries

Elena Bobeica, Olegs Tkacevs and Styliani Christodoulopoulou
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Elena Bobeica: European Central Bank
Styliani Christodoulopoulou: European Central Bank

No 2016/04, Working Papers from Latvijas Banka

Abstract: This paper studies the importance of price and cost competitiveness for intra- and extra-euro area trade flows of euro area countries. A standard error correction framework shows that price competitiveness is a relatively more important driver of trade flows outside the euro area as compared to those within the monetary union, especially for exports, that tend to be more sensitive to relative prices than imports. We consider various measures of competitiveness and conclude that it is difficult to single out one that outperforms the others. Using an encompassing test, measures based on labour costs appear to contain relatively more information for trade flows, particularly for exports outside the euro area. The key policy implication is that, in order to adjust competitiveness disequilibria within the monetary union, measures, such as structural policies fostering non-price competitiveness should be pursued in the deficit countries besides those aimed at price and cost adjustments.

Keywords: price and cost competitiveness; intra- and extra-euro area trade; error correction model (search for similar items in EconPapers)
JEL-codes: F14 F15 F41 (search for similar items in EconPapers)
Date: 2016-11-07
New Economics Papers: this item is included in nep-eec and nep-int
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Citations: View citations in EconPapers (7)

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Working Paper: The role of price and cost competitiveness for intra- and extra-euro area trade of euro area countries (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ltv:wpaper:201604

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