MACROECONOMIC STATISTICS

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MACROECONOMIC STATISTICS

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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

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MACROECONOMIC STATISTICS

Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

ELTE Faculty of Social Sciences, Department of Economics

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MACROECONOMIC STATISTICS

Week 9

International competitiveness Part I

Real exchange rates and competitiveness

Gábor Oblath

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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

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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

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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

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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

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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): 

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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

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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

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RER and appreciation/depreciation (two conventions - pay attention)

Sarno – Taylor: PPP and

The Real Exchange Rate (2002), p.67. IMF: Hungary… (2004)

* /P P Q S

* P S P Q

This „S” (and Q) is the inverse of

this RER(A)

RER(B)

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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

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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

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Combined effect of factors affecting the

RER

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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

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y-s and p-s (relative to the US) total and filtered sample

A) összes (134) ország 2000-ben

USA=100 összes

y = 0,8733x + 22,501 R² = 0,6449

0 20 40 60 80 100 120 140 160

0 50 100 150

p y

B) szűrt: 122 ország

USA=100 (Lux és nagyon kilógók nélkül)

y = 0,9956x + 18,102 R² = 0,7516

0 20 40 60 80 100 120 140 160

0 20 40 60 80 100 120

Total, 2000

Filtered, 2000

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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.”

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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

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Quantifying the equilibrium RER:

alternative approaches

• BEER

• FEER

• NATREX

• IMF: Macroeconomic Balance

• A review article with applications for CEE

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

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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/ENMNB/

Kiadvanyok/mnben_konvergenciajelentes/mnben_ko nvjel_20100519/konvergencia_elemzes_2010_en.pdf

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Alternative estimates for the under/overvaluation of the HUF relative to the equilibrium RER (Csajbók, 2003)

(overvaluation if RER<0)

-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

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Supplement on REER-data and ULC-based RER-indices

• Data on nominal and (alternative) real exchange rates:

– EU DG-ECFIN NEER-REER database

http://ec.europa.eu/economy_finance/db_indicators/index_en.htm

• Interpretation of ULC-indices 

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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

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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 = (WPy)/(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)

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Decomposition of real ULC in manufacturing for international comparison (in EUR)

) ) (

: ( )

( GVAdefl eur

emp vol GVA emp

eur Comp

GVA ULC  Comp 

eur GVAdefl eur

Comp ( )

) : (

/ )

 (

Producer real wage

Labour cost/emp -Eur Labour productivity

Eur-deflator

output/emp in Eur

Real ULC

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Manufacturing nominal ULC (vs. real)

eur GVAdefl eur

Comp ( )

) : ( /

)

 ( ULC nom

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Manufacturing AWS (adjusted wage share) and real-ULC: levels (V4 countries)

40 45 50 55 60 65 70

2000 2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

0,40 0,45 0,50 0,55 0,60 0,65

2000 2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

Real ULC change 

%

AWS: corrected for self-employed

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Real ULC (2000=100)

1. producer real wage/productivity

70 80 90 100 110

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 100 120 140 160 180 200 220

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 100 120 140 160 180 200 220 240

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

Producer real wage

Real ULC

Productivity

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Real ULC-index (2000=100)

2. (Eur-wage/emp)/(Eur-productivity)

70 80 90 100 110

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 100 120 140 160 180 200 220 240 260

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 100 120 140 160 180 200 220 240 260

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

ULC-index

Eur-wage/emp

Eur-GVA/emp 

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GVA/emp in eur = productivity*deflator (in eur)

80 100 120 140 160 180 200 220 240 260

2001 2002 2003 2004 2005 2006 2007

CZ HU PO

SK 80

100 120 140 160 180 200 220 240

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 90 100 110 120 130 140

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

Eur-GVA/emp

Productivity index

Deflator in EUR

???

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Deflator in eur = deflator in national currency*1/e

80 90 100 110 120 130 140

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

80 90 100 110 120 130 140

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

Deflator in eur

Deflator in nc

1/e [nominal exchange rate index (appreciation: )]

80 90 100 110 120 130 140

2001 2002 2003 2004 2005 2006 2007

CZ HU PO SK

Deflators vs. export price indices in euros???

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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)

MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

ELTE Faculty of Social Sciences, Department of Economics

MACROECONOMIC STATISTICS

Week 9

International competitiveness Part I

Real exchange rates and competitiveness

Gábor Oblath

Outline

• International competitiveness: alternative interpretations

• Technical and substantive issues regarding competitiveness and exchange rates

Interpretations international competitiveness (preliminary)

What competitiveness does not mean

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

Why begin with exchange rates?

• Fundamentally (in a macroeconomic sense):

• Technically:

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

Concepts – overview

RER and appreciation/depreciation (two conventions - pay attention)

PPP-theories

Beyond PPP-theories: the Balassa-Samuelson (BS) hypothesis; and beyond BS

• Predictions regarding

• Major assumptions regarding the T-NT sector

• The „Penn-effect” vs. BS effect

• Other explanations of the Penn-effect

Combined effect of factors affecting the

RER

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

Samuelson in 1994

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

The FEER: an illustration

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:

• Interpretation of ULC-indices 

The ULC (-index)

Real vs. nominal ULC

• Real ULC: W/Y = W/(Qy*Py) =(W/Py)/Qy,

• Nominal ULC = W/Qy= W/[(Qy*Py)/Py]=

(W/Y)*Py = (W*Py)/(Qy*Py)

Example: bilateral comparisons

• If data for all countries expressed in a common currency (e.g. EUR):

• For the latter:

Decomposition of real ULC in manufacturing for international comparison (in EUR)

• **Real ULC: W/Y = W/(Qy*Py) =(W/Py)/Qy,**

• **Nominal ULC = W/Qy= W/[(Qy*Py)/Py]=**

(W/Y)Py = (WPy)/(Qy*Py)