MACROECONOMIC STATISTICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
2 Author: Gábor Oblath
Supervised by Gábor Oblath January 2011
Week 9
International competitiveness Part I
Real exchange rates and competitiveness Outline
• International competitiveness: alternative interpretations
• Technical and substantive issues regarding competitiveness and exchange rates
– Nominal and real exchange rates (RERs) and the relation of RERs to competitiveness (Rogoff, 2006)
– PPP-theories, BS-effect and the Penn effect – Approaches to the equilibrium RER
– ULC and ULC-based RERs
3
Interpretations international competitiveness (preliminary)
1. Nothing –”dangerous obsession”: P. Krugman (1994)
2. ”Good things” (high GDP and rapid growth – WEF–GCR etc.) 3. Increase in external market share
4. Factors contributing to the increase in external market share
price and cost competitiveness (RER) 5. Solution of a potential conflict between 3. and 4.:
non-price (non-cost), i.e., qualitative competitiveness
What competitiveness does not mean
A) The improvement of the trade/CA balance (NX=GDP-DA; CA=I-S) B) Increase in FDI-inflows
Both A) and B) may be effected by competitiveness but also by other factors
Technical and conceptual issues: RER- indices, exchange rate theories
• Why begin with exchange rates?
• Technical issues: the meaning of under/overvaluation
• PPP-theories
• If PPP BS hypothesis
• If BS, other approaches to the RER
4
Why begin with exchange rates?
• Fundamentally (in a macroeconomic sense):
– Competitiveness = price/cost competitiveness
– Under/overvaluation of the currency [”misalignment”]
• Technically:
– Price/cost competitiveness statistical indicators – Important to clarify: NER, NEER, RER, REER
– Understand the logic behind alternative conventions, i.e.
• In some statistics and papers (+most textbooks): depreciation:
• In others (IMF, EU):
Warming up: a brief return to the BigMac index
• A caricature of under/overvaluation of currencies, but:
• Helps understand
– The concept of under/overvaluation (misalignment);
– The logic behind alternative expressions
5
Concepts – overview
• Nominal exchange rate (E)
– Nom. exchange rate index (e.g. HUF/EUR) (NER) – Nominal-effective exchange rate index (NEER)
• Price level (GDP, consumer etc.) [Pi..; Pi..*]
• PPP [dom. Price/foreign) PPPi [Pi/Pi*]
• Relative price level (in common currency) RPLi= PPPi/E
• Exchange rate deviation index, ERDIi= E/PPPi
• Relative price index [Pi’/Pi*’]
• RER
• REER
6
RER and appreciation/depreciation (two conventions - pay attention)
PPP-theories
• Samuelson: ”promise what is rare in economics”: exact predictions
• Relation between RER-indices and PPP (according to PPP theories, E=PPP, thus RER=E/PPP=1, or (dE/E)/(dPPP/PPP)=1]
• Types of PPP theories – Descriptive normative – Absolute relative
7
Beyond PPP-theories: the Balassa-
Samuelson (BS) hypothesis; and beyond BS
• Predictions regarding – Levels
– Dynamics
• Major assumptions regarding the T-NT sector
• The „Penn-effect” vs. BS effect
• Other explanations of the Penn-effect – Bhagwati
– The role of demand
– The relative price of the T-sector
Combined effect of factors affecting the
RER
8
PPP-theory or Penn effect: what do the PWTs demonstrate?
• Penn World Tables:
– Relationship between relative real per capita GDP (y) and relative price levels (p) [=PPP/E]
– Overall: clear indication of the Penn effect
– Due to large differences in p-s corresponding to large differences in y-s – Among countries at similar y-s, no clear relationship with p-s
y-s and p-s (relative to the US) total and
filtered sample
9
Samuelson in 1994
“Much of what Ricardo, Harrod, Balassa, or Samuelson say boils down to repetition of the brute fact of the Penn effect. Some of what is said, however, consists of specifying sufficient scenarios to create a Penn effect…
My own researches, published and unpublished, re-emphasize that sufficient conditions need not be necessary… sufficient scenarios abound that can entail anti-Penn effects.
The Penn effect is important, but it is not an inevitable truth of economic history.”
Equilibrium real exchange rate
• Elusive concept (not PPP, not BS-corrected PPP, but…)
• Exchange rate corresponding to equilibrium (in some sense)
• Equilibrium real appreciation: by definition
– Appreciation that does not harm competitiveness
• This may happen through nominal appreciation
• Higher inflation than in partner countries
Quantifying the equilibrium RER: alternative approaches
• BEER
• FEER
• NATREX
• IMF: Macroeconomic Balance
• A review article with applications for CEE
10 Balázs Égert, László Halpern and Ronald MacDonald: Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues.
http://www.oenb.at/en/img/wp106_tcm16-36593.pdf
The FEER: an illustration
• The real exchange rate: a relative price expected to support both internal and external balance
I I (internal balance curve): DA =da(R, -NFL(-R), Z)
XX (external balance curve) CA* =ca(-DA, -R, Z) CA: current account, DA: domestic absorption, R:
real exchange rate, M: imports, X: exports, NFL:
net foreign liabilities, Z: other (competitiveness) factors that influence the equilibrium exchange rate (TFP, tax system, product quality, labour skills )
• If the level of the current account balance tolerated by the market declines, the XX curve shifts to the left
• (E.g. the current account balance has to be adjusted due to increasing risk aversion) it tends to depreciate the real exchange rate and reduce domestic absorption
• See MNB:
http://english.mnb.hu/Root/Dokumentumtar/ENM NB/Kiadvanyok/mnben_konvergenciajelentes/mn ben_konvjel_20100519/konvergencia_elemzes_
2010_en.pdf
11
Alternative estimates for the
under/overvaluation of the HUF relative to the equilibrium RER (Csajbók, 2003)
(overvaluation if RER<0)
Supplement on REER-data and ULC-based RER-indices
• Data on nominal and (alternative) real exchange rates:
– EU DG-ECFIN NEER-REER database
-12 -10 -8 -6 -4 -2 0 2 4 6
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
%
-12 -10 -8 -6 -4 -2 0 2 4 6
%
FEER partial MB BEER single eq.
PEER BEER panel NATREX single eq.
NATREX structural
12 http://ec.europa.eu/economy_finance/db_indicators/index_en.htm
• Interpretation of ULC-indices
The ULC (-index)
• Unit labour cost
(W/Y)=(W/L)/(L/W) wage bill/output = wage rate/labour productivity
W: labour (wage) cost; Y: output (value-added) L: labour (persons or hours worked)
• The statistical terminology regarding ULC is logical, but may be rather deceiving:
– ”Nominal ULC”: the ratio of nominal labour cost (at current prices) to real output (i.e., output at constant prices)
– ”Real ULC” (or ”wage share”): the ratio of nominal labour cost (at current prices) to nominal output (at current prices)
• Try to explain the strange terminology
Real vs. nominal ULC
• Real ULC: W/Y = W/(Qy*Py)=(W/Py)/Qy,
• W: labour cost, Qy: volume of output; Py: price of output
• i.e., real ULC (wage share):
– the ratio of nominal labour cost - deflated by the price of output - relative to the volume of output
– (nominal labour cost, deflated by the price of output: producer real wage)
• Nominal ULC = W/Qy= W/[(Qy*Py)/Py]= (W/Y)*Py = (W*Py)/(Qy*Py)
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Example: bilateral comparisons
• If data for all countries expressed in a common currency (e.g. EUR):
– possible to make comparisons in pairs (useful info) (partial info on cost-competitiveness)
– but no info on overall relative cost-competitiveness
• For the latter:
– REER indices are necessary (the first E stands for effective, i.e., against all commercial partners/competitors)
Decomposition of real ULC in
manufacturing for international comparison
(in EUR)
14
Manufacturing nominal ULC (vs. real)
Manufacturing AWS (adjusted wage share)
and real-ULC: levels (V4 countries)
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Real ULC (2000=100) 1. producer real
wage/productivity
16
Real ULC-index (2000=100)
2. (Eur-wage/emp)/(Eur-productivity)
GVA/emp in eur = productivity*deflator
(in eur)
17
Deflator in eur = deflator in national
currency*1/e
18
The big puzzle:
deflators for manufacturing and export price indices (in euro) (2000=100)
80 90 100 110 120 130 140
2001 2002 2003 2004 2005 2006 2007
CZ HU PO SK
95 100 105 110 115 120 125 130 135 140 145
2000 2001 2002 2003 2004 2005 2006 2007
CZpx(g) Hupx(g) PLpx(g) SKpx(g)
