Skip to main content

Advertisement

SpringerLink
Log in

Measuring the effectiveness of cost and price competitiveness in external rebalancing of euro area countries: What do alternative HCIs tell us?

  • Original Paper
  • Published:
Empirica Aims and scope Submit manuscript

Abstract

This study examines the marginal effects of traditional determinants of exports and imports with a focus on the role of price competitiveness in restoring external balances in the euro area. It is a first attempt to compare marginal effects of various harmonised competitiveness indicators (HCIs) on both exports and imports of both goods and services across individual euro area countries. We find evidence that HCIs based on broader cost and price measures have a larger marginal effect (with some exceptions) on exports of goods. Exports of services are sensitive to HCIs in big euro area countries and Slovakia, where exports of services are also found more sensitive to competitiveness indicators based on broader price measures. Imports of goods and imports of services are quite insensitive to changes in relative prices. Finally, in some cases measures of fit indicate that a large unexplained residual part is present, implying that other non-price related factors might play an important role in driving foreign trade and policies aimed at enhancing the quality of goods traded are warranted.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For the way Harmonised competitiveness indicators (HCIs) are constructed see Schmitz et al. (2012).

  2. For a discussion on the merits and shortcomings of different HCIs see Ca'Zorzi and Schnatz (2007) and Schmitz et al. (2012).

  3. For Ireland only non-seasonally adjusted data are available, so we seasonally adjusted these data using the TRAMO SEATS methodology.

  4. For more information on measuring foreign demand, see Hubrich and Karlsson (2010).

  5. For Greece the sample period starts in 2000:Q1, for Ireland in 1998:Q1 and for Slovakia in 1997:Q1. In the case of Belgium, the breakdown of exports into exports of goods and exports of services is not available; therefore Belgium is excluded from the dataset.

  6. For more details on Italian competitiveness see European Commission (2013a) or Manasse (2013).

  7. See Statistics Netherlands (2013) for details.

  8. See for instance the discussion in Sect. 3 of the in-depth reviews part of the Macroeconomic Imbalances Procedure for France (European Commission (2013b)). Market services represent 23 % of production costs in industrial sector and 25 % in manufacturing sector. It is estimated that a 10 % increase in wages in the services sector would lead, ceteris paribus, to increases of 7.7 and 3.9 % in the cost for services and the manufacturing sector, respectively.

  9. IMF (2013) points at large unexplained component in the analysis of Greek exports which might indicate the lack of non-price competitiveness in Greece.

  10. Ireland and Luxembourg, for instance, export mainly other services, which include professional, financial, legal, R&D services. If we consider these types of services to be higher value added compared to travel and tourism services, this might explain the low price sensitivity of exports in services for these two countries.

  11. This is evidenced by the rank of countries according to the Herfindahl index for the last 3 years.

  12. We have made these calculations for countries where exports were found to be sensitive to price competitiveness.

  13. For instance a productivity shock may simultaneously raise exports and improve competitiveness, thus introducing bias in a relationship between two variables.

  14. Results are available upon request.

  15. By negative effect we mean that exports elasticity as regards domestic demand is negative, which implies that falling domestic demand is translated into rising exports.

  16. See Berman et al. (2011) for details.

  17. See Barrell and Te Velde (2002) for a summary of studies on import equations, where the income elasticity is found to exceed 1 or even 2.

  18. The main difference between our study and that part of the existing empirical literature, that finds significant and positive relative price effects on imports, might be the time period covered. In this study the estimation extends up to 2012, while in the majority of other studies it mainly stops before the outset of the economic and financial crisis in 2007–2008.

  19. ECB (2005) and Bussiere et al. (2011) document that the relationship between exports and imports has become stronger due to the internationalization of production processes and the dependence of the tradable sector on imported inputs.

References

  • Allard C (2009) Competitiveness in Central-Europe: what has happened since EU accession? IMF Working Paper No. 121

  • Allard C, Catalan M, Everaert L, Sgherri S (2005) France, Germany, Italy and Spain: explaining differences in external sector performances among large euro area countries. In: Cottarelli C, Ghosh A, Milesi-Ferretti GM, Tsangarides C (eds) Exchange rate analysis in support of IMF surveillance: a collection of empirical studies. International Monetary Fund, Washington

    Google Scholar 

  • Altomonte C, Di Mauro F, Osbat C (2013) Going beyond labour costs: how and why “structural” and microbased factors can help explaining export performance? ECB COMPNET Policy brief No. 1

  • Anderton R, Tewolde T (2011) The global financial crisis: trying to understand the global trade downturn and recovery. World Econ 34:741–763

    Article  Google Scholar 

  • Antras P, Segura-Cayuela R, Rodriguez D (2010) Firms in international trade with an application to Spain. http://scholar.harvard.edu/files/antras/files/ponencia_sae_0.pdf

  • Ariu A (2013) Crisis-proof services: why trade in services did not suffer during the 2008–2009 collapse, ECB Working Paper No. 1691

  • Barrell R, Te Velde DW (2002) European integration and manufactures import demand: an empirical investigation of ten European countries. Ger Econ Rev 3(3):263–293

    Article  Google Scholar 

  • Barrell R, Dees S (2005) World trade and global integration in production processes: a re-assessment of import demand equations, ECB Working Paper No. 503

  • Bayoumi T, Harmsen R, Turunen J (2011) Euro area export performance and competitiveness, IMF Working Paper No. 11/140

  • Benkovskis K, Worz J (2012) Non-price competitiveness gains of Central, Eastern and Southeastern European countries in the EU market, focus on European economic integration Q3/12

  • Benkovskis K, Worz J (2014) What drives the market share changes? Price versus non-price factors, ECB Working Paper No. 1640

  • Berman N, Berthou A, Hericourt J (2011) Export dynamics and sales at home, CEPR Discussion Paper No. 8684

  • Bojesteanu E, Manu AS (2012) Disentangling the factors behind the external adjustment in the new member states during the crisis, presentation at the CompNet conference. https://www.ecb.europa.eu/home/pdf/research/compnet/CompNet_ECB_Bojesteanu.pdf??32e073ca232a28b2ec6561f44e87d4fa

  • Borchert I, Mattoo A (2009) The crisis-resilience of services trade, World Bank Policy Research Working Paper No. 4917

  • Bussiere M, Callegari G, Ghironi F, Sestieri G, Yamano N (2011) Estimating trade elasticities: demand composition and the trade collapse of 2008–09. Am Econ J Macroecon 5:118–151

    Article  Google Scholar 

  • Ca’zorzi M, Schnatz B (2007) Explaining and forecasting euro area exports: which competitiveness indicator performs best? In: De Grauwe P (ed) The many dimensions of competitiveness. MIT Press, Cambridge

    Google Scholar 

  • Crane L, Crowley M, Quayyum S (2007) Understanding the evolution of trade deficits: trade elasticities of industrialized countries. Econ Perspect 31:2–17

    Google Scholar 

  • Di Mauro F, Forster K (2008) Globalisation and the competitiveness of the euro area, ECB Occasional Paper No. 97

  • Dieppe A, Warmedinger T (2007) Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area, ECB Working Paper No. 760

  • Esteves P, Rua A (2013) Is there a role for domestic demand pressure on export performance? ECB Working Paper No. 1594

  • European Central Bank (2005) Competitiveness and the export performance of the euro area, ECB Occasional Paper No. 30

  • European Central Bank (2013) Competitiveness research network: first year results

  • European Commission (2013a) In-depth review for Italy, Commission Staff Working Document

  • European Commission (2013b) Macroeconomic imbalances France 2013, EC Occasional Paper No. 136

  • Giordano C, Zollino F (2014) Exploring price and non-price determinants of trade flows in the largest euro area countries, Bank of Italy Occasional Paper No. 233

  • Hubrich K, Karlsson T (2010) Trade consistency in the context of the eurosystem projection exercises, ECB Occasional Paper No. 108

  • International Monetary Fund (2013) Rebalancing the euro area: where do we stand and where to go, chapter in euro area selected issues paper, IMF Country Report No. 13/232

  • Manasse P (2013) The roots of the Italian stagnation. http://www.voxeu.org/article/roots-italian-stagnation. Accessed 29 July 2015

  • NATIXIS (2013) High price elasticity of exports in volume terms is a sign of a serious problem (weak market positioning), but also a clear opportunity: a decline in production costs, if it led to a fall in prices, would increase exports and production. Flash Economics No. 215

  • Pogany P, Donnelly W (1998) The income elasticity of trade: theory, evidence, and implications, US International Trade Commission Working Paper

  • Schmitz M, De Clercq M, Fidora M, Lauro B, Pinheiro C (2012) Revisiting the effective exchange rates of the euro, ECB Occasional Paper No. 134

  • Statistics Netherlands (2013) Dutch producer prices rise more rapidly than EU average. http://www.cbs.nl/en-GB/menu/themas/dossiers/eu/publicaties/archief/2013/2013-ppi-eu-art.htm

  • Stirbock C (2006) How strong is the impact of exports and other demand components on German import demand? Evidence from euro-area and non-euro-area imports, Deutsche Bundesbank Discussion Paper No. 39

  • Thorbecke W, Kato A (2012) The effect of exchange rate changes on Germany’s exports, RIETI Discussion Paper No. 12-E-081

Download references

Acknowledgments

We would like to thank the participants of internal seminars at the ECB and the Bank of Latvia, as well as participants of the COMPNET meeting in Frankfurt in December 2013 for very useful comments. Also we would like to thank Chiara Osbat (ECB), Kostantins Benkovskis (BoL) as well as an anonymous referee for their useful suggestions and comments. Finally, we are grateful to Maarten de Clercq (ECB) and Martin Schmitz (ECB) for providing us with the alternative measures of harmonised competitiveness indicators used in the current paper. Any errors or omissions are exclusively our own responsibility.

Author information

Authors and Affiliations

  1. Directorate General Economics, European Central Bank, Sonnemannstrasse 20, 60314, Frankfurt am Main, Germany

    Styliani Christodoulopoulou

  2. Monetary Policy Department, Bank of Latvia, Kr. Valdemara iela 2a, Riga, 1050, Latvia

    Oļegs Tkačevs

Authors
  1. Styliani Christodoulopoulou
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Oļegs Tkačevs
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Oļegs Tkačevs.

Additional information

This Working Paper should not be reported as representing the views of the European Central Bank (ECB) or the Bank of Latvia (BoL). The views expressed are those of the authors and do not necessarily reflect those of the ECB or the BoL.

Appendices

Appendix 1

See Fig. 1.

Fig. 1
figure 1figure 1figure 1figure 1

Harmonized competitiveness indicators (HCIs) of individual euro area countries, Index 2001Q1 = 100. Source Authors’ calculations

Full size image

Appendix 2

See Tables 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24 and 25.

Table 13 Goodness of fit (adjusted R-squares) of estimated equations for exports of goods
Full size table
Table 14 Goodness of fit (adjusted R-squares) of estimated equations for exports of services
Full size table
Table 15 Long-run elasticity of exports of goods with respect to HCIs (excluding a contemporaneous effect of HCI)
Full size table
Table 16 Long-run elasticity of exports of services with respect to HCIs (excluding a contemporaneous effect of HCI)
Full size table
Table 17 Long-run elasticity of exports of goods with respect to HCIs (using HCIs weighted by exports only)
Full size table
Table 18 Long-run elasticity of exports of services with respect to HCIs (using exports of goods as an explanatory variable)
Full size table
Table 19 Goodness of fit (adjusted R-squares) of estimated equations for imports of goods
Full size table
Table 20 Goodness of fit (adjusted R-squares) of estimated equations for imports of services
Full size table
Table 21 Long-run elasticity of imports of goods with respect to HCIs (excluding a contemporaneous effect of HCI)
Full size table
Table 22 Long-run elasticity of imports of services with respect to HCIs (excluding a contemporaneous effect of HCI)
Full size table
Table 23 Long-run elasticity of imports of goods with respect to HCIs (using HCIs weighted by imports only)
Full size table
Table 24 Long-run elasticity of imports of goods with respect to HCIs (using import adjusted domestic demand)
Full size table
Table 25 Long-run elasticity of imports of services with respect to HCIs (using import adjusted domestic demand)
Full size table

Appendix 3

See Table 26.

Table 26 Absolute contribution of different HCIs to goods and services exports growth
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Christodoulopoulou, S., Tkačevs, O. Measuring the effectiveness of cost and price competitiveness in external rebalancing of euro area countries: What do alternative HCIs tell us?. Empirica 43, 487–531 (2016). https://doi.org/10.1007/s10663-015-9303-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-015-9303-5

Keywords

JEL Classification

Search

Navigation