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

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.