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We are grateful to Enrica Detragiache, Luca Ricci, and participants at the “The Czech and Slovak Economies: 17 Years After,” seminar organized by the European Commission, at an IMF European Department seminar and at a Slovakia Ministry of Finance seminar for very valuable comments and suggestions. All errors remain our sole responsibility.
Because ULC are based on output per labor, it is a better measure for productivity when supply shocks are more important than demand shocks. However, with the sample composed entirely of converging new EU members, the impact of demand shocks has been relatively less important during this period.
In the remainder of the paper, we use the external competitiveness term to refer to competitiveness applied at the country level.
Haddad and Pancaro (2010) summarize the recent literature on the relationship between economic growth and the real exchange rate.
These determinants are often captured under the “nonprice fundamentals” label.
ULC growth is approximately equal to growth in hourly labor compensation minus growth in labor productivity. Labor productivity growth in turn can be decomposed into a contribution made by multifactor productivity growth, that made by increased capital intensity, and that resulting from changes in the composition of the workforce (labor quality); see Kaci (2006) for more detail.
The unit value ratio is calculated as the unit value of a country’s exports of a given product relative to the unit value of all countries’ exports of that product.
Bennett and Zarnic also introduce a methodology to identify countries’ direct international competitors more accurately and include services exports in their analysis.
The set of comparator countries includes Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovenia, the countries considered together with Slovakia in the econometric exercise in Section VI.
The VAT rate was temporarily raised to 20 percent in 2011 as part of the fiscal consolidation effort.
Although FDI does not enter the current account directly, it often goes along with imports of goods.
Or, more broadly, consistent with a specified evolution of the net foreign assets position; see Lee et al., 2008.
Only misalignment estimates expressed as percentage deviations of the REER from equilibrium are comparable across countries.
For an early application of such regression to the transition economies see De Broeck and Sløk (2006), and for a methodological criticism Zalduendo (2008).
According to the regression results in equation (1) from Podkaminer (2010), P=exp(3.503617 + 0.010294.Y), where P is the relative price level and Y the relative per capita income. This gives a predicted relative price level of 70½ percent in 2009.
The Vienna Institute database also transforms the data by relative GDP in PPP terms for each country, a transformation which we undo.
However, to the extent real GDP per capita is a poor proxy of these variables, and if additional variables, labor taxation for instance, matter for the behavior of relative ULCs, the residuals of the regression of relative ULC on the selected regressors nay reflect not only relative competitiveness but also omitted variables.
Bennett and Zarnic (2010) discuss a generic aggregation approach which takes into account the importance of each sector-destination pair in a country’s total exports.