Artus, Jacques, and Malcolm Knight (1984), “Issues in the Assessment of the Exchange Rate in Industrial Countries,” IMF Occasional Paper No. 29, Washington: International Monetary Fund.
Durand, Martine, and Claude Giorno (1987), “Indicators of International Competitiveness: Conceptual Aspects and Evaluation,” OECD Economic Studies, 9, 147-82.
Khan, Moshin (1986), “Comment” in Economic Adjustment and Exchange Rates in Developing Countries, S. Edwards and L. Ahamed, eds, Chicago: The University of Chicago Press.
Lipschitz, Leslie, and Donogh McDonald (1991), “Real Exchange Rates and Competitiveness: A Clarification of Concepts and Some Measurements for Europe,” IMF Working Paper WP/91/25.
Marsh, Ian W., and Stephen P. Tokarick (1994), “Competitiveness Indicators: A Theoretical and Empirical Assessment,” IMF Working Paper WP/94/29.
McGuirk, Anne K. (1987), “Measuring Price Competitiveness for Industrial Country Trade in Manufactures,” IMF Working Paper WP/87/34.
Turner Phillip and Jozef Van’t dack (1993), “Measuring International Price and Cost Competitiveness,” Bank for International Settlements, Paper No. 39.
Wickham, Peter (1993), “A Cautionary Note on the Use of Exchange Rate Indicators,” Paper on Policy Analysis and Assessment, No. 93/5, Washington: International Monetary Fund.
The revision to the INS conducted over 1994-96 was a cooperative effort that involved very many colleagues in the Fund. We are extremely grateful to Owen Evans for his steady guidance throughout this endeavor and to all the country economists that provided input and support to this effort. We also wish to thank Teng-Siew Boxall and Can Demir for their considerable assistance with the implementation of the modifications to the INS, as well as Anne McGuirk and Peter Wickham for numerous helpful conversations.
The complete list of countries for which nominal and real effective exchange rates series are computed under the INS is presented in Appendix II.
Since capital goods are traded internationally and financial market integration tends to equalize real long–term interest rates, the emphasis on labor costs to assess international competitiveness seems warranted.
These factors can distort the interpretation of ULC–based REER indices in the following way: differential increases in nonlabor costs will affect the relative competitive position of a country but will not be recorded in the index; a higher capital–labor ratio, which entails higher capital costs and lower unit labor costs, lead to a ULC–based indicator that overestimates competitiveness; the procyclical changes in productivity add statistical noise to the indices.
See Appendix I for a derivation of this decomposition and details on the interpretation of its various elements.
Econometrically, this involves choosing estimates of trend productivity in such a way as to minimized the squared deviations between the actual and the filtered series as well as the squared differences of consecutive changes in the estimated trend.
The use of disaggregated data meant that, in addition to the derivation shown in this subsection, the computation of competitiveness weights involved a weighted summation over all 143 products, with weights reflecting the relative importance of each of these products.
These 46 countries and regions are Antigua and Barbuda, Austria, The Bahamas, Barbados, Belize, Costa Rica, Cyprus, Dominica, Dominican Republic, Egypt, El Salvador, Fiji, France, Germany, Greece, Grenada, Italy, Jamaica, Japan, Jordan, Kenya, Kiribati, Maldives, Mali, Malta, Mauritius, Morocco, Nepal, Netherlands Antilles, Portugal, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Seychelles, Spain, Syrian Arab Republic, Thailand, Togo, Tonga, Tunisia, Turkey, United Kingdom, Unites States, Vanuatu, Western Samoa and Republic of Yemen.
The 20 percent cutoff was chosen on practical grounds. With this threshold, trade in tourism services is incorporated in the computation of competitiveness weights for all countries where tourism is recognized to be an important source of foreign exchange; and, at the same time, extraction and manipulation of the data on tourism needed to compute the weights remain manageable.
After this truncation, for obvious reasons, the set of remaining bilateral weights, i.e., all the weights originally above 1 percent, are scaled so that they add up to 1.
To be precise, updated series were computed with the methodology and data described in this paper from January 1990 on. The former series were then spliced with the updated series at January 1990.
The group of countries or regions referred to as “Preferred Reporters” is made of Australia, Austria, Belgium/Luxembourg, Canada, Denmark, Finland, France, Federal Republic of Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States, Iceland, Israel, Turkey, South Africa, China, Hong Kong, India, Korea, Singapore, and Taiwan, Province of China.
In the case of three tourism exporters (Dominica, El Salvador and Kenya) a breakdown of arrivals does not exist for the three years 1988-90, and the available information for 1991 has been used.