A novel three-market view of price competitiveness

Abstract

A country’s price competitiveness is generally proxied by the real effective exchange rate of its currency. In this article we present a novel three-market breakdown (domestic, euro-area and non-euro area markets) of this measure, with an application to the four main euro-area countries. Price-competitiveness developments are indeed found to be heterogeneous across markets, thereby confirming the usefulness of this decomposition. In particular, we find that in the 1999–2018 period only Germany recorded comparable (large) gains in both euro and non-euro area markets. France posted a larger gain, and Spain marked a smaller loss, in euro-area markets; conversely, Italy’s mild improvement was greater in non-euro area markets. Finally, competitiveness in the domestic market and that in non-euro area markets are found to be the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.