We would like to thank Sharmini Coorey and Mark Lutz for helpful suggestions.
Throughout this paper, a decline in a REER or NEER index denotes a depreciation or gain in competitiveness. See Appendix for data sources and variable definitions.
The developments across sectors were, however, uneven and may be partly related to very strong productivity gains that are characteristic of cyclical turning points. Therefore, it could be premature to suggest that the Irish manufacturing productivity has returned to its earlier trend.
The real effective exchange rate as reported in the IMF’s International Financial Statistics (IFS) matches the index of output-weighted REER relatively closely. However, the recent pick-up in the latter index goes largely unnoticed in the IFS index because it is smoothed using a Hodrick-Prescott (H-P) filter. There are tradeoffs between these measures. The filtering used in the IFS index smooths out cyclical swings in productivity to obtain a gauge of underlying trends. On the other hand, H-P filters suffer from well-known end-point problems. Moreover, it can be argued that the output-weighted index measures competitiveness more accurately than the IFS index, since it applies industry-specific partner-country trade weights, rather than partner weights based on aggregate export trade.